EUR/GBP climbs to six-week highs as UK stagflation concerns weigh on Sterling

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The Euro (EUR) extends gains against the British Pound (GBP) for the second day, with EUR/GBP surging to its highest level since August 7 despite stronger-than-expected UK Retail Sales data.

EUR/GBP extends gains for a second day, climbing to six-week highs.
The British Pound is under pressure despite stronger UK Retail Sales data.
UK stagflation concerns grow with high inflation, weak growth and a softening jobs market

The Euro (EUR) extends gains against the British Pound (GBP) for the second day, with EUR/GBP surging to its highest level since August 7 despite stronger-than-expected UK Retail Sales data.

At the time of writing, the cross is trading around 0.8713, easing slightly from an intraday high of 0.8728, as Sterling remains under pressure from the Bank of England’s (BoE) cautious monetary policy stance following this week’s decision to hold rates.

UK Retail Sales for August surprised to the upside across the board. Retail Sales rose 0.5% MoM, slightly above the 0.4% forecast and matching the prior month’s revised 0.5% (from 0.6%). Core Retail Sales (excluding fuel) jumped 0.8% MoM, well above the 0.3% expected and double July’s revised 0.4% (from 0.5%).

On an annual basis, headline sales increased 0.7% YoY, beating the 0.6% consensus but easing from a revised 0.8% in July (from 1.1%). Core sales rose 1.2% YoY, above the 0.8% forecast, and slightly above July’s revised 1.0% (from 1.3%).

The data highlight that households are still spending despite elevated borrowing costs and sticky inflation, underscoring a degree of resilience in the demand side of the economy. While the upward surprise is encouraging, it's worth noting that July’s figures were revised lower, suggesting earlier estimates overstated the strength of the consumer.

The release, however, did little to change the broader macroeconomic outlook, with stagflation risks still hanging over the UK economy. Inflation remains elevated at 3.8% YoY, nearly double the BoE’s 2% target, while Gross Domestic Product (GDP) growth slowed to just 0.3% QoQ in the second quarter. At the same time, the labour market is beginning to soften, with unemployment edging toward 4.7% and payrolled jobs declining.

With growth slowing, inflation elevated and the labour market softening, the BoE voted 7-2 to keep the Bank Rate at 4.00% on Thursday and announced a slowdown in its quantitative tightening programme.

Adding to Sterling’s woes, the latest fiscal data stoked fresh concerns about the UK’s public finances. UK 10-year gilt yields climbed to 4.7%, a two-week high, after net borrowing surged to £18 billion in August, sharply above the £12.8 billion forecast and the highest for the month in five years.

(This story was corrected on September 19 at 14:01 GMT to say that the UK Core Retail Sales YoY reading in August was above July's figure, not softer.)

BoE FAQs

What does the Bank of England do and how does it impact the Pound?

The Bank of England (BoE) decides monetary policy for the United Kingdom. Its primary goal is to achieve ‘price stability’, or a steady inflation rate of 2%. Its tool for achieving this is via the adjustment of base lending rates. The BoE sets the rate at which it lends to commercial banks and banks lend to each other, determining the level of interest rates in the economy overall. This also impacts the value of the Pound Sterling (GBP).

How does the Bank of England’s monetary policy influence Sterling?

When inflation is above the Bank of England’s target it responds by raising interest rates, making it more expensive for people and businesses to access credit. This is positive for the Pound Sterling because higher interest rates make the UK a more attractive place for global investors to park their money. When inflation falls below target, it is a sign economic growth is slowing, and the BoE will consider lowering interest rates to cheapen credit in the hope businesses will borrow to invest in growth-generating projects – a negative for the Pound Sterling.

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

In extreme situations, the Bank of England can enact a policy called Quantitative Easing (QE). QE is the process by which the BoE substantially increases the flow of credit in a stuck financial system. QE is a last resort policy when lowering interest rates will not achieve the necessary result. The process of QE involves the BoE printing money to buy assets – usually government or AAA-rated corporate bonds – from banks and other financial institutions. QE usually results in a weaker Pound Sterling.

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

Quantitative tightening (QT) is the reverse of QE, enacted when the economy is strengthening and inflation starts rising. Whilst in QE the Bank of England (BoE) purchases government and corporate bonds from financial institutions to encourage them to lend; in QT, the BoE stops buying more bonds, and stops reinvesting the principal maturing on the bonds it already holds. It is usually positive for the Pound Sterling.