EUR/GBP trades lower as German consumption data disappoints, BoE cuts eyed

• EUR/GBP gives back part of its recent gains following disappointing German data.
• Eurozone Manufacturing PMI moves back above 50, signaling an improvement in activity.
• The Pound Sterling remains under pressure amid expectations of Bank of England rate cuts.

EUR/GBP trades lower around 0.8750 on Monday at the time of writing, down 0.23% on the day, after two consecutive days of gains. The cross is facing profit-taking as the Euro (EUR) is weighed down by weaker-than-expected consumption data in Germany.

German Retail Sales fell by 0.9% MoM in January, well below market expectations for a modest 0.2% decline, following an upwardly revised 1.2% increase in the previous month. On a yearly basis, sales growth slowed to 1.2% from 2.5% in December. This deceleration raises concerns about the strength of domestic demand in the Eurozone’s largest economy.

At the same time, business surveys provide a more encouraging signal. The Hamburg Commercial Bank (HCOB) Germany Manufacturing Purchasing Managers Index (PMI) rose to 50.9 in February from 49.1 in January. The Eurozone Manufacturing PMI was confirmed at 50.8, up from 49.5 in the previous month. Both indicators reached their highest levels in 44 months and moved back above the 50 threshold that separates expansion from contraction, suggesting a gradual improvement in manufacturing momentum.

On the UK side, the S&P Global Manufacturing PMI came in at 51.7 in February, slightly below the flash estimate of 52 and market expectations, and little changed from January’s 17-month high of 51.8. Although activity remains in expansion territory, the pace appears less robust than initially anticipated.

The Euro could nevertheless find some support in the cautious stance of the European Central Bank (ECB). ECB President Christine Lagarde recently stated that Eurozone inflation is expected to stabilize around the 2% target over the medium term, highlighting the effectiveness of the disinflation process. She added that rising labor income in a resilient job market, along with increased investment in defense, infrastructure and digital technologies, should support economic activity.

By contrast, the Pound Sterling (GBP) remains sensitive to expectations of monetary easing. Bank of England (BoE) Governor Andrew Bailey told Parliament’s Treasury Committee that there is scope for rate cuts if inflation returns to the 2% target. At the same time, BoE Chief Economist Huw Pill warned about upside risks to inflation in the United Kingdom (UK), arguing that the disinflation trend has been slower than anticipated, keeping the debate open on the pace of future easing.

The UK political backdrop adds another layer of uncertainty. The Labour Party’s defeat in the Gorton and Denton by-election has reignited questions about Prime Minister Keir Starmer’s leadership ahead of local elections in May, limiting appetite for the Pound Sterling.