Euro retreats against Pound Sterling as Eurozone Retail Sales disappoint

• EUR/GBP snaps a four-day winning streak after reaching its highest level since July 1.
• Weak Eurozone Retail Sales weigh on the Euro, while hawkish remarks from BoE Chief Economist Huw Pill support the Pound.
• Diverging ECB-BoE policy expectations and UK fiscal concerns could limit the cross’s downside.

EUR/GBP trades on the back foot on Friday, snapping a four-day winning streak that pushed the cross above 0.8600 to its highest level since July 1. Softer-than-expected Eurozone Retail Sales data weighs modestly on the Euro (EUR). At the time of writing, EUR/GBP trades around 0.8590, down roughly 0.10% on the day.

Eurozone Retail Sales fell 0.6% MoM in July, missing expectations for a 0.3% increase and reversing the previous month’s 0.2% gain. On an annual basis, sales rose 0.6%, below the 1.1% forecast and slowing from 1.4% previously.

Bank of England (BoE) Governor Andrew Bailey offered no fresh signal about the next interest-rate decision on Friday. Bailey said policymakers have some choice over how quickly inflation returns to target, but stressed that it must do so. He also said high debt levels reflect substantial challenges facing governments and are adding to pressure on bond markets.

Hawkish comments from BoE Chief Economist Huw Pill on Thursday provide some support to the British Pound (GBP). Pill reiterated his preference for raising the Bank Rate to 4%, arguing that a “prompt increase in Bank Rate may head off some potential insidious catch-up dynamics.”

The downside is likely to remain limited as markets expect the European Central Bank (ECB) and the BoE to follow different policy paths at their upcoming meetings this month. Broader concerns over the UK fiscal outlook could also limit demand for the Pound Sterling (GBP).

The ECB is widely expected to raise interest rates for a second time this year at its September 9-10 meeting as policymakers respond to inflation risks linked to higher Oil prices amid tensions in the Middle East. In contrast, the BoE is expected to leave the Bank Rate unchanged at 3.75% on September 17. This policy divergence supports the EUR/GBP upside, while broader concerns over the UK fiscal outlook could also limit demand for the Pound Sterling.

Rabobank flags Pound vulnerability as UK budget looms

Rabobank strategists argue that the Pound is at a structural disadvantage compared with many of its G10 peers, noting that “GBP does not have this advantage” of a lower foreign ownership share in its government bond market. They highlight that “the proportion of UK government debt owned by foreign investors is relatively high compared with other G10 countries,” which in their view “increases the likelihood that any gilt market jitters will also be reflected in a weaker pound.”

Looking ahead, Rabobank expects the forthcoming fiscal event to be a key driver for the currency, stating that “the October 28 UK budget will remain front of mind for GBP markets in the weeks ahead” and, as a result, they “anticipate some discomfort for the pound.” The bank concludes that “together these factors suggest that GBP may be more sensitive to budget concerns than many of its G10 peers” and, “in view of the proximity of the UK budget next month and the uncertainties connected with it,” they “expect EUR/GBP to be biased higher, towards 0.87 on a 3-month view.”