EUR/GBP holds below 0.8350 following stronger-than-expected UK Retail Sales

EUR/GBP, though trading slightly higher on the session, held below a key area of short-term resistance at 0.8350 on Friday, keeping the pair’s downside bias of the last week alive. Weighing on the pair was stronger-than-expected UK January Retail Sales figures that showed sales were up 1.9% MoM – better than the forecast 1.0% MoM gain, and showing a substantial portion of December’s 4.0% MoM drop had been recovered. Recall that the rapid spread of the Omicron variant in the UK in December and an associated tightening of Covid-19 curbs had weighed on spending at the time.

With Omicron infection rates falling off sharply since mid-January and the government removing virtually all restrictions (in England, at least), the recovery is expected to continue in February and March. But economists continue to fret about the impact that incoming tax and energy price hikes in April will have on the economy. "The key issue… will be whether this apparent bounce back in consumption will be able to withstand the forthcoming increase in taxation and energy bills… which will take a significant chunk out of worker pay,” said analysts at Equiti Capital.

That probably explains why EUR/GBP wasn’t able to push substantially below Thursday’s lows in the 0.8330s on Friday, though the pair did squeeze out a fresh weekly low at 0.8331. Another factor lending some support was hawkish commentary from ECB policymaker and Slovak central bank governor Peter Kazimir, who threw his support behind an axing of QE in August and immediate rate hike thereafter. The hawkish drift at the ECB towards accelerated tightening in H2 this year is evident, though continued expectations for more near-term BoE tightening likely shield EUR/GBP from ECB-related upside risk for now.