EUR/GBP edges higher as German Retail Sales and Inflation data provide a mixed picture for the ECB

EUR/GBP steadies on German Retail Sales and Inflation data.
The Eurozone faces pressure as the ECB reassesses its potential interest rate path.
The British Pound fails to extend gains despite rising inflation and a positive growth outlook.

Tammy Da Costa, CFTe®FXStreet

The Euro (EUR) is firming against the British Pound (GBP) on Friday, with EUR/GBP holding above the 100-day Simple Moving Average (SMA) near 0.8415.

This week has seen notable contrasts between the United Kingdom and the Eurozone, particularly as markets factor in how the Bank of England (BoE) and the European Central Bank (ECB) are likely to approach the coming months.

Germany’s Retail Sales figures send mixed signals to Euro traders

Germany’s April Retail Sales fell by 1.1% MoM, a sharper drop than the 0.2% increase that had been expected. Despite the weak monthly figure, the annual reading came in stronger than forecast at 2.3%, providing some reassurance that underlying demand hasn’t collapsed.

German inflation data provides a potential headwind for the ECB

The Preliminary Consumer Price Index (CPI) figures for May were in line with expectations, matching forecasts on both a monthly and yearly basis.

However, the preliminary Harmonised Index of Consumer Prices (HICP) — which reflects inflation in a format standardised across European Union member states — rose by 0.2% MoM (vs. 0.1% forecast) and 2.1% YoY (vs. 2.0% forecast).

Overall, the data paints a picture of a sluggish consumer environment with inflation still running a little hotter than ideal, keeping pressure on the ECB as it assesses when to place its monetary easy policy on hold.

Meanwhile, recent Inflation data released from the United Kingdom (UK) this week surprised to the upside. Additionally, the International Monetary Fund (IMF) raised its growth outlook for the UK on Tuesday, leading to expectations that the BoE may hold rates steady for a longer period.

The monetary policy divergence remains a key theme for EUR/GBP, contributing to the potential direction of the pair in the near term.

Central banks FAQs

What does a central bank do?

Central Banks have a key mandate which is making sure that there is price stability in a country or region. Economies are constantly facing inflation or deflation when prices for certain goods and services are fluctuating. Constant rising prices for the same goods means inflation, constant lowered prices for the same goods means deflation. It is the task of the central bank to keep the demand in line by tweaking its policy rate. For the biggest central banks like the US Federal Reserve (Fed), the European Central Bank (ECB) or the Bank of England (BoE), the mandate is to keep inflation close to 2%.

What does a central bank do when inflation undershoots or overshoots its projected target?

A central bank has one important tool at its disposal to get inflation higher or lower, and that is by tweaking its benchmark policy rate, commonly known as interest rate. On pre-communicated moments, the central bank will issue a statement with its policy rate and provide additional reasoning on why it is either remaining or changing (cutting or hiking) it. Local banks will adjust their savings and lending rates accordingly, which in turn will make it either harder or easier for people to earn on their savings or for companies to take out loans and make investments in their businesses. When the central bank hikes interest rates substantially, this is called monetary tightening. When it is cutting its benchmark rate, it is called monetary easing.

Who decides on monetary policy and interest rates?

A central bank is often politically independent. Members of the central bank policy board are passing through a series of panels and hearings before being appointed to a policy board seat. Each member in that board often has a certain conviction on how the central bank should control inflation and the subsequent monetary policy. Members that want a very loose monetary policy, with low rates and cheap lending, to boost the economy substantially while being content to see inflation slightly above 2%, are called ‘doves’. Members that rather want to see higher rates to reward savings and want to keep a lit on inflation at all time are called ‘hawks’ and will not rest until inflation is at or just below 2%.

Is there a president or head of a central bank?

Normally, there is a chairman or president who leads each meeting, needs to create a consensus between the hawks or doves and has his or her final say when it would come down to a vote split to avoid a 50-50 tie on whether the current policy should be adjusted. The chairman will deliver speeches which often can be followed live, where the current monetary stance and outlook is being communicated. A central bank will try to push forward its monetary policy without triggering violent swings in rates, equities, or its currency. All members of the central bank will channel their stance toward the markets in advance of a policy meeting event. A few days before a policy meeting takes place until the new policy has been communicated, members are forbidden to talk publicly. This is called the blackout period.

Author

Tammy Da Costa, CFTe®

FXStreet

Tammy is an economist and market analyst with a deep passion for financial markets, particularly commodities and geopolitics.

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