EUR/GBP posts modest gains near 0.8800 on weak UK Retail Sales

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The EUR/GBP cross trades with mild gains near 0.8790 during the early European trading hours on Monday. A softer-than-expected UK Retail Sales report for October weighs on the Pound Sterling (GBP) against the Euro (EUR). Germany’s November IFO Business Survey data will be published later on Monday.

EUR/GBP gains ground to around 0.8790 in Monday’s early European session.
UK Retail Sales unexpectedly fell by 1.1% MoM in October, boosting BoE rate cut bets.
The ECB is widely anticipated to end its rate-cutting cycle by the end of this year.

Data from the Office for National Statistics showed on Friday that the UK Retail Sales declined for the first time in five months in October, falling 1.1% month-over-month in October, compared to a rise of 0.7% in September (revised from 0.5%). This figure came in weaker than the expectation of 0% in the reported month.

The poor UK Retail Sales report, combined with slower Purchasing Managers Index (PMI) growth and disappointing Gross Domestic Product (GDP), increased expectations of a potential interest rate cut by the Bank of England (BoE), exerting some selling pressure on the Pound Sterling.

The UK government's Autumn Budget is scheduled for Wednesday and is likely to influence the decision to wait, as the BoE awaits more clarity on its potential impact on the economy. Chancellor of the Exchequer Rachel Reeves is expected to raise income taxes on households to fill the £22 billion shortfall in the government's finances.

The European Central Bank (ECB) seems to be nearing the end of its rate-cutting cycle, with most analysts expecting no rate change at the December meeting and only a slim chance of a further quarter-percentage-point reduction in 2026. This is consistent with the ECB’s message that inflation is contained. Eurozone inflation hovered at 2.1% in October, and underlying measures remain consistent with the ECB’s medium-term 2% target.

Euro FAQs

What is the Euro?

The Euro is the currency for the 20 European Union countries that belong to the Eurozone. It is the second most heavily traded currency in the world behind the US Dollar. In 2022, it accounted for 31% of all foreign exchange transactions, with an average daily turnover of over $2.2 trillion a day. EUR/USD is the most heavily traded currency pair in the world, accounting for an estimated 30% off all transactions, followed by EUR/JPY (4%), EUR/GBP (3%) and EUR/AUD (2%).

What is the ECB and how does it impact 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. The ECB’s primary mandate is to maintain price stability, which means either controlling inflation or stimulating growth. Its primary tool is the raising or lowering of interest rates. Relatively high interest rates – or the expectation of higher rates – will usually benefit the 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.

How does inflation data impact the value of the Euro?

Eurozone inflation data, measured by the Harmonized Index of Consumer Prices (HICP), is an important econometric for the Euro. If inflation rises more than expected, especially if above the ECB’s 2% target, it obliges the ECB to raise interest rates to bring it back under control. Relatively high interest rates compared to its counterparts will usually benefit the Euro, as it makes the region more attractive as a place for global investors to park their money.

How does economic data influence the value of the Euro?

Data releases gauge the health of the economy and can impact on the Euro. Indicators such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can all influence the direction of the single currency. A strong economy is good for the Euro. Not only does it attract more foreign investment but it may encourage the ECB to put up interest rates, which will directly strengthen the Euro. Otherwise, if economic data is weak, the Euro is likely to fall. Economic data for the four largest economies in the euro area (Germany, France, Italy and Spain) are especially significant, as they account for 75% of the Eurozone’s economy.

How does the Trade Balance impact the Euro?

Another significant data release for the Euro 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 then its currency will gain in value 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.