British Pound outperforms Euro despite weak UK Retail Sales data

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EUR/GBP trades on the back foot on Friday and is set to end the week in negative territory, as the British Pound (GBP) outperforms most major peers despite weaker-than-expected UK Retail Sales data, while upbeat German economic data fails to provide meaningful support to the Euro (EUR).

EUR/GBP trades near more than one-week lows as the British Pound outperforms despite weak UK Retail Sales data.
Stronger German IFO and GDP data fail to lift the Euro amid concerns over slowing Eurozone growth and rising inflation pressure.
Cautious comments from ECB President Christine Lagarde add to pressure on the Euro.

Data released earlier on Friday showed Germany’s IFO Business Climate Index rose to 84.9 in May from 84.5 in April, beating market expectations of 84.2 and signaling improving business sentiment in the Eurozone’s largest economy.

The IFO Current Assessment gauge climbed to 86.1 from 85.4 previously, while the Expectations Index edged up to 83.8 from 83.5. Additional data showed Germany’s GfK Consumer Confidence survey for June improved to -29.8 from -33.1 in the previous month.

Meanwhile, Germany’s final Q1 Gross Domestic Product (GDP) reading confirmed the economy expanded 0.3% QoQ and 0.4% YoY.

In the United Kingdom, Retail Sales fell 1.3% MoM in April after rising 0.6% in March, marking a steeper decline than the 0.6% drop expected by markets. On an annual basis, Retail Sales growth slowed to 0% from 1.4% previously, missing forecasts for a 1.3% increase.

The Euro remains under pressure as rising energy prices linked to ongoing Middle East tensions continue to fuel concerns over the Eurozone’s heavy dependence on imported energy. Data released earlier this week showed inflation pressures accelerating across the bloc while business activity weakened sharply, reinforcing fears of slower economic growth.

The Euro also struggled to gain support after cautious remarks from European Central Bank (ECB) President Christine Lagarde, who reiterated that policymakers would continue to follow a “data-dependent, meeting-by-meeting approach.” Lagarde added that long-term inflation expectations remain broadly well anchored and stressed that the ECB would take the necessary measures to maintain price stability at its 2% target.

ECB FAQs

What is the ECB and how does it influence the Euro?

The European Central Bank (ECB) in Frankfurt, Germany, is the reserve bank for the Eurozone. The ECB sets interest rates and manages monetary policy for the region. The ECB primary mandate is to maintain price stability, which means keeping inflation at around 2%. Its primary tool for achieving this is by raising or lowering interest rates. Relatively high interest rates will usually result in a stronger Euro and vice versa. The ECB Governing Council makes monetary policy decisions at meetings held eight times a year. Decisions are made by heads of the Eurozone national banks and six permanent members, including the President of the ECB, Christine Lagarde.

What is Quantitative Easing (QE) and how does it affect the Euro?

In extreme situations, the European Central Bank can enact a policy tool called Quantitative Easing. QE is the process by which the ECB prints Euros and uses them to buy assets – usually government or corporate bonds – from banks and other financial institutions. QE usually results in a weaker Euro. QE is a last resort when simply lowering interest rates is unlikely to achieve the objective of price stability. The ECB used it during the Great Financial Crisis in 2009-11, in 2015 when inflation remained stubbornly low, as well as during the covid pandemic.

What is Quantitative tightening (QT) and how does it affect the Euro?

Quantitative tightening (QT) is the reverse of QE. It is undertaken after QE when an economic recovery is underway and inflation starts rising. Whilst in QE the European Central Bank (ECB) purchases government and corporate bonds from financial institutions to provide them with liquidity, in QT the ECB stops buying more bonds, and stops reinvesting the principal maturing on the bonds it already holds. It is usually positive (or bullish) for the Euro.