Euro trades flat against British Pound as UK Retail Sales beat forecasts

EUR/GBP trades little changed on Friday as stronger-than-expected UK Retail Sales data lends some support to the British Pound (GBP) after it came under pressure following the Bank of England’s (BoE) monetary policy announcement on Thursday. At the time of writing, the cross trades around 0.8587, staying within the narrow range that has been in place for more than a month.

Data released by the Office for National Statistics showed that UK Retail Sales rose 0.5% MoM in August, beating expectations for a 0.2% decline. On an annual basis, sales increased 2.4%, above the 1.9% forecast. Retail Sales excluding fuel also rose 0.6% MoM and 2.7% YoY.

The BoE kept interest rates unchanged at 3.75% for the sixth straight meeting in a 6-3 vote. Policymakers said there has been little evidence so far of significant second-round effects from higher Oil prices on domestic prices and wages, although they acknowledged that inflation risks are tilted to the upside

The decision left the BoE looking less hawkish than several other major central banks and weighed on the Pound. The Bank of Japan (BoJ) raised interest rates by 25 basis points earlier on Friday, following similar moves from the Federal Reserve (Fed) this week and the European Central Bank (ECB) earlier this month.

Still, BoE Governor Andrew Bailey kept the door open to future rate hikes, saying, “If the conflict in the Middle East persists for an extended period, as appears to be the case, and the risk of second-round effects emerging increases, it is likely that policy may have to tighten.”

Brown Brothers Harriman’s Elias Haddad points out that market pricing for the Bank of England remains aggressive, with “the swaps curve continues to imply about 100bps of BoE rate hikes in the next twelve months to 4.75%.”

However, BBH argues “the BoE may not need to tighten as much as markets expect,” noting that “the UK economy is already operating below capacity, Bank Rate at 3.75% is near the top of the BoE’s estimated 2% to 4% neutral range, and fiscal policy will likely turn more restrictive.” BBH concludes that the “bottom line: GBP remains vulnerable to a dovish BoE repricing.”

On the Euro (EUR) side, ECB President Christine Lagarde said on Friday that growth is “a bit more promising than we thought,” while adding that policymakers are “not seeing second-round effects yet.” She stressed that energy is a significant variable and that the ECB is well positioned to respond, but said interest-rate decisions will be made “meeting by meeting.”