EUR/GBP slides as UK PMIs and Retail Sales beat expectations
- EUR/GBP weakens as strong UK PMI and Retail Sales data lift Sterling across the board.
- BoE’s Greene strikes a cautious tone on disinflation, cooling near-term rate cut bets.
- Eurozone PMI data remain mixed, while ECB rate expectations stay anchored near 2.00%.
The Euro (EUR) weakens against the British Pound (GBP) on Friday, with Sterling outperforming its major peers after stronger-than-expected UK economic data. At the time of writing, EUR/GBP is trading around 0.8677 after climbing to a three-week high near 0.8745 earlier this week.
Preliminary S&P Global Purchasing Managers Index (PMI) figures signaled a sharp improvement in UK business activity at the start of the year. The flash Composite PMI rose to 53.9 in January from 51.4 in December, marking the strongest expansion in private-sector output since April 2024.
The services sector led the upturn, with the flash Services PMI climbing to 54.3 from 51.4, a 21-month high, while manufacturing conditions continued to stabilize, as the flash Manufacturing PMI improved to 51.6 from 50.6, the strongest reading in 17 months.
Chris Williamson, Chief Business Economist at S&P Global Market Intelligence, said the January flash PMI is “indicative of a robust quarterly GDP growth approaching 0.4%.”
UK Retail Sales data also surprised to the upside. Figures from the Office for National Statistics showed Retail Sales rose 0.4% MoM in December, rebounding from a 0.1% decline in November. On an annual basis, sales accelerated to 2.5% from 1.8% (revised up from 0.6%), above market expectations of 1.0%.
Retail Sales excluding fuel rose 0.3% MoM in December, beating forecasts for a 0.2% decline after falling 0.4% in November, while the annual rate accelerated to 3.1% from 2.6% (revised up from 1.2%), also above expectations of 1.4%.
Comments from Bank of England (BoE) policymaker Megan Greene added to Sterling’s support. Greene said she is now less concerned about weakening demand, warning instead that the greater risk lies in a slowdown in disinflation, adding that looser Federal Reserve (Fed) policy could push UK inflation higher.
The upbeat data and Greene’s remarks have tempered near-term rate cut expectations, reinforcing the view that the BoE can afford to remain patient before easing further.
On the Euro side, preliminary HCOB PMI figures painted a mixed picture of economic momentum across the Eurozone. The flash Composite PMI came in at 51.5 in January, slightly below market expectations of 51.6 and unchanged from December.
Manufacturing PMI rose to 49.4 in January from 48.8 in December, above expectations of 49.0, while the Services PMI slipped to 51.9 from 52.4, missing forecasts of 52.8.
On the monetary policy front, a report published by BHH said the European Central Bank (ECB) is in a good position to keep interest rates on hold for some time. The swaps curve is pricing in a steady ECB deposit rate at 2.00% over the next twelve months.
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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