EUR/GBP softens to near 0.8650 on weak German Retail Sales, ECB and BoE rate decisions loom

EUR/GBP softens to around 0.8660 in Thursday’s early European session.
German Retail Sales fell by 2.0% MoM in March, weaker than expected.
The ECB and BoE interest rate decisions will take center stage later on Thursday.

Lallalit Srijandorn FXStreet

The EUR/GBP cross declines to near 0.8660 during the early European trading hours on Thursday. The Euro (EUR) weakens against the Pound Sterling (GBP) following the downbeat German Retail Sales data. The preliminary readings of Gross Domestic Product (GDP) from Germany and the Eurozone are due later on Thursday. Also, the European Central Bank (ECB) and the Bank of England (BoE) interest rate decisions will be in the spotlight.

Data released by Destatis on Thursday showed that German Retail Sales, a key measure of consumer spending, fell 2.0% MoM in March. This figure followed a decline of 0.3% in February (revised from -0.6%) and came in weaker than the expectations of a 0.1% decrease.

On an annualized basis, Retail Sales dropped 2.0% in March, versus an estimated rise of 0.5% and the prior release of 0.9% growth (revised from 0.7%). The EUR attracts some sellers in an immediate reaction to the weaker German economic data.

The ECB is widely expected to keep interest rates unchanged at its policy meeting on Thursday due to high uncertainty. Nonetheless, rising inflation, driven by energy price volatility from the Iran war, has raised the expectation of a rate hike in June. Economists predict a quarter-point hike at June’s meeting, and markets now fully price two additional ones after that before the year is out, according to Bloomberg.

The BoE is likely to keep interest rates on hold at its April policy meeting on Thursday as it awaits the economic fallout from the Iran war. Traders will closely monitor the speech from BoE Governor Andrew Bailey for any ‌suggestions that higher borrowing costs are likely to be needed.

“The hikes fully priced into financial markets were already weighing on the economy, reducing the likelihood that the BoE will actually have to raise Bank Rate, at least for now,” said Andrew Wishart, senior UK economist at Berenberg.

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.

Author

Lallalit Srijandorn

FXStreet

Lallalit Srijandorn is a Parisian at heart. She has lived in France since 2019 and now becomes a digital entrepreneur based in Paris and Bangkok.

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