Euro holds gains against British Pound after weaker UK Retail Sales data
- EUR/GBP trades with mild gains near 0.8570 in Friday’s early European session.
- UK Retail sales dropped 0.5% MoM in July, while annual sales growth slowed to 1.6% during the same period.
- Expectations of tightening ECB policy support the Euro against the British Pound.
The EUR/GBP cross posts modest gains to around 0.8570 during the early European session on Friday. The British Pound (GBP) edges slightly lower against the Euro (EUR) following disappointing UK economic data. Traders await the preliminary readings of the Purchasing Managers Index (PMI) from Germany, the Eurozone and the United Kingdom (UK) for fresh impetus.
UK Retail Sales fell for the first time since April, with the total volume of goods sold in stores and online declining 0.5% MoM in July, according to the Office for National Statistics (ONS) on Friday. This figure followed a rise of 0.7% in June (revised from 1.0%). The market consensus was for a 0.5% decline in the reported month.
Meanwhile, the annual Retail Sales in the UK increased 1.6% in July versus a rise of 3.8% prior (revised from 4.2%) and worse than the 2.2% expected. The core Retail Sales, stripping the auto motor fuel sales, declined by 0.9% MoM in July, versus 0.9% (revised from 1.1%) prior and the estimated -0.5% figure.
The GBP attracts modest sellers in an immediate reaction to the weaker UK Retail Sales data. The Bank of England (BoE) is likely to leave interest rates unchanged at 3.75% for the rest of the year, according to a strong majority of economists polled by Reuters.
On the other hand, financial markets are now pricing in a continuation of the European Central Bank (ECB) hiking cycle. The ECB Watch Tool indicates a 90% to 94% chance of a 25 basis points (bps) hike to 2.50% at the next policy meeting scheduled for September 9.
BoE rate expectations ease as inflation and labour data cool
Analysts at Danske Bank note that the latest inflation release, when viewed alongside “yesterday's weak labour market data,” has helped to temper market expectations for further tightening. They highlight that the combination of softer price pressures and deteriorating employment indicators “has taken the top off BoE pricing for the remainder of the year,” as investors reassess the likelihood of additional rate hikes.
Technical Analysis: EUR/GBP remains capped under the 100-day SMA
In the daily chart, EUR/GBP maintains a mildly bearish bias as it holds below the 100-day simple moving average (SMA). Price is consolidating just above the 20-period Bollinger middle band, with the upper band capping the latest rebound. The Relative Strength Index (14) at 54.33 is slightly above the neutral line, hinting at stabilizing momentum but not yet strong enough to challenge the prevailing topside constraints.
On the topside, immediate resistance is located at the upper Bollinger band around 0.8585, followed by the 100-day SMA at 0.8615, which forms a more significant barrier to any sustained recovery. On the downside, initial support is provided by the Bollinger middle band at 0.8560, ahead of the lower band near 0.8535, where a break would reopen the path toward deeper losses.
(The technical analysis of this story was written with the help of an AI tool. Know more.)
Pound Sterling FAQs
The Pound Sterling (GBP) is the oldest currency in the world (886 AD) and the official currency of the United Kingdom. It is the fourth most traded unit for foreign exchange (FX) in the world, accounting for 12% of all transactions, averaging $630 billion a day, according to 2022 data. Its key trading pairs are GBP/USD, also known as ‘Cable’, which accounts for 11% of FX, GBP/JPY, or the ‘Dragon’ as it is known by traders (3%), and EUR/GBP (2%). The Pound Sterling is issued by the Bank of England (BoE).
The single most important factor influencing the value of the Pound Sterling is monetary policy decided by the Bank of England. The BoE bases its decisions on whether it has achieved its primary goal of “price stability” – a steady inflation rate of around 2%. Its primary tool for achieving this is the adjustment of interest rates. When inflation is too high, the BoE will try to rein it in by raising interest rates, making it more expensive for people and businesses to access credit. This is generally positive for GBP, as higher interest rates make the UK a more attractive place for global investors to park their money. When inflation falls too low it is a sign economic growth is slowing. In this scenario, the BoE will consider lowering interest rates to cheapen credit so businesses will borrow more to invest in growth-generating projects.
Data releases gauge the health of the economy and can impact the value of the Pound Sterling. Indicators such as GDP, Manufacturing and Services PMIs, and employment can all influence the direction of the GBP. A strong economy is good for Sterling. Not only does it attract more foreign investment but it may encourage the BoE to put up interest rates, which will directly strengthen GBP. Otherwise, if economic data is weak, the Pound Sterling is likely to fall.
Another significant data release for the Pound Sterling is the Trade Balance. This indicator measures the difference between what a country earns from its exports and what it spends on imports over a given period. If a country produces highly sought-after exports, its currency will benefit purely from the extra demand created from foreign buyers seeking to purchase these goods. Therefore, a positive net Trade Balance strengthens a currency and vice versa for a negative balance.
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