EUR/GBP drops sharply after UK’s upbeat Services PMI and Eurozone’s weak Retail Sales

The EUR/GBP pair drops vertically after facing selling pressure near 0.8680 in the European session. The cross attracts sellers’ interest due to the upbeat United Kingdom’s Services PMI and the Eurozone’s weak consumer spending data.

S&P Global reported UK Services PMI at 49.3, higher than expectations and the former release of 47.2. The economic data failed to capture the 50.0 threshold for the second time in a row but a strong recovery has improved optimism among market participants. The service activity is in the contraction phase as firms cut back on non-essential business and declining consumer spending.

The UK firms are facing headwinds from higher borrowing costs due to tight monetary policy by the Bank of England (BoE) and a weak order book due to subdued economic conditions.

Fears of a slowdown in the UK economy persist as BoE Governor Andrew Bailey warned about more inflation shocks ahead. Bailey opposed the UK’s 2% inflation target. He is confident about UK Prime Minister Rishi Sunak fulfilling his promise of halving inflation to 5.2% by the year-end.

On the Eurozone front, weaker-than-anticipated Retail Sales data for August has dented the appeal for the Euro. The annualized consumer spending contracted by 2.1% while investors forecasted a decline of 1.2% against a 1% contraction reading in July. On a monthly basis, the economic data contracted significantly by 1.2% vs. estimates and the former reading of 0.3% and 0.1% contraction respectively. It seems that households are struggling to bear the burden of higher interest rates and sticky inflation.

Meanwhile, European Central Bank (ECB) President Christine Lagarde reiterated that interest rates will remain sufficiently restrictive to ensure price stability.