Euro trims gains against British Pound following unexpected September decline in Germany’s Retail Sales

• EUR/GBP gives up some gains near 0.8345 as European trading gets under way on Monday.
• A 2.0% MoM decline in Germany’s September Retail Sales undershot market expectations.
• Thursday’s November policy meeting is expected to see the BoE raise the Bank Rate to 4.0%.

Gains in EUR/GBP fade near 0.8345 in Monday’s early European trading, with the Euro (EUR) slipping marginally after disappointing German Retail Sales figures. The currency’s downside could, however, be contained by stronger-than-anticipated Q3 Gross Domestic Product (GDP) readings from Germany and the Eurozone.

September’s German Retail Sales declined 2.0% MoM, Monday’s Destatis release showed, missing market forecasts for a 0.4% increase. The key consumer-spending indicator had risen 1.2% in August, revised from 1.3%. On an annualised basis, September Retail Sales stood at -2.3%, against the preceding decline of 0.3%, revised from -0.4.

Attention in the UK turns to Thursday’s interest rate announcement from the Bank of England (BoE). A Reuters poll of economists points to an increase in the Bank Rate from 3.75% to 4.0% at the November policy meeting. Such a move would mark the first rate hike since August 2023.

Alexander Harvey, UK economist at consultancy Oxford Economics, said: "While we don't expect a clear steer from the Committee on how many hikes they're planning, it's possible that the meeting minutes or Bailey ... signal that Bank Rate is unlikely to reach the level that is priced in by financial markets,"

Could the UK budget reduce the gilt risk premium and keep EUR/GBP under pressure?

UK rates continue to include a "20bp risk premium in 10-year UK gilt yields", ING analysts note. Rates Strategist Michiel Tukker says this premium "could come out of the market during today's UK budget release." In their assessment, the budget "is not expected to have too much say on the Bank of England's tightening prospects," but they warn that "any upside surprises on minimum wage adjustments could hawkishly ripple through money markets."

Turning to the implications across markets, ING says "some narrowing in the gilt-bund spread today could be a reminder that the UK looks to be one of the few G7 economies heading in the right fiscal direction into 2027," alongside forecasts for "the budget deficit heading inside 4% of GDP as higher inflation drags more income tax payers into higher tax brackets."

For currencies, ING notes that "EUR/GBP is holding above 0.8350 support and is looking heavy." Unless there are "any surprise budget giveaways that hit gilts," its expectation is that "EUR/GBP can stay heavy and potentially nudge down to the 0.8315 area."

Does Nagel’s inflation warning strengthen the hawkish case for the Euro?

An FXS Speechtracker score of 8.2/10 for ECB’s Nagel, against a historical average of 6.9/10, points to a more pronounced hawkish stance than usual. Expectations that further policy tightening remains a clear option are reinforced by the commitment that the ECB “will take decisive action if needed to bring inflation back to target”.

Persistent inflationary pressures remain a concern in Nagel’s remarks: consumer-price growth has accelerated again, while further price rises “can’t be ruled out”. With higher energy costs identified as a key driver, the speech lends support to a hawkish bias for the Euro. Should inflation fail to moderate, markets may assign a higher probability to restrictive policy being renewed or maintained for longer.

Technical Analysis: Can EUR/GBP shake off its bearish bias below the 100-day SMA?

Trading below both the 20-day Bollinger middle band and the 100-day simple moving average (SMA), EUR/GBP displays a distinctly bearish near-term bias on the daily chart. Its considerable distance beneath the upper Bollinger band also suggests that upside remains capped. Meanwhile, the Relative Strength Index (14) reads 23, placing it in oversold territory: selling pressure continues, but the decline already looks stretched.

The lower Bollinger band, near 0.8315, provides the first downside support. Any recovery would initially face the 20-day Bollinger SMA around 0.8410, with the upper Bollinger band at 0.8505 the next hurdle. Beyond that, the 100-day SMA at 0.8535 represents a firmer resistance level; a move back above it would be needed to temper the broader bearish bias.

(The technical analysis of this story was written with the help of an AI tool. Know more.)