EUR/GBP advances ahead of highly anticipated BoE, ECB decisions

• EUR/GBP edges higher as investors assess mixed macroeconomic signals in the Eurozone.
• A sharp contraction in Eurozone Retail Sales tempers optimism sparked by a strong rebound in German Factory Orders.
• Monetary policy decisions in the Eurozone and the United Kingdom dominate market attention for the day.

EUR/GBP trades around 0.8670 on Thursday at the time of writing, up 0.30% on the day, supported by some weakness in the Pound Sterling (GBP) ahead of the Bank of England’s (BoE) monetary policy decision, which is due later in the day, despite mixed economic indicators from the Eurozone.

On the Euro (EUR) side, the latest macroeconomic data have sent conflicting signals. Eurozone Retail Sales fell by 0.5% in December, a much steeper contraction than the 0.2% decline expected by the market consensus. In addition, November figures were revised lower, now showing growth of just 0.1% compared with the previously estimated 0.2%. These data reinforce concerns about the strength of domestic demand and limit the positive impact of other, more encouraging indicators.

At the same time, German Factory Orders surged in December, rising by 7.8%, well above market expectations that had pointed to a 2.2% contraction. November figures were also revised higher, confirming a firmer momentum in Germany’s industrial sector. However, this positive development has not been enough to fully offset the disappointment stemming from weak consumption data, a key factor for the Eurozone growth outlook.

Investors also remain cautious ahead of the European Central Bank (ECB) decision, which is scheduled for later in the day. The central bank is widely expected to leave interest rates unchanged, reinforcing its wait-and-see approach. Markets will focus mainly on President Christine Lagarde’s rhetoric, as the recent strength of the Euro has revived concerns about deflationary pressures. Any dovish signal could renew downward pressure on the single currency against its major peers.

On the UK side, the Pound Sterling remains under pressure ahead of the Bank of England announcement. Investors broadly expect the central bank to keep interest rates unchanged at 3.75%, following the cut delivered at the previous meeting. Attention will instead turn to the Monetary Policy Report and Governor Andrew Bailey’s press conference, which could provide clues on the future pace of monetary easing.

The UK macroeconomic backdrop argues for a cautious stance from the BoE. The labour market continues to show signs of weakness, with the Unemployment Rate remaining elevated, while inflationary pressures are expected to gradually converge toward the 2% target over the medium term. These factors keep expectations alive for further rate cuts, weighing on the Pound Sterling and, in the near term, supporting the advance in EUR/GBP.