EUR/GBP Edges Lower as German Data Weighs on Euro

Key Moments

EUR/GBP Under Pressure in Early European Trade

The EUR/GBP cross is trading close to 0.8660 in early European dealings on Thursday, with the Euro (EUR) easing against the Pound Sterling (GBP). The move comes as softer-than-expected German Retail Sales data weighs on the single currency while markets position ahead of key central bank decisions later in the day.

Investors are also awaiting the preliminary Gross Domestic Product (GDP) releases from both Germany and the broader Eurozone on Thursday, which could provide further direction for the pair.

German Retail Sales Disappoint on Monthly and Annual Basis

Fresh figures from Destatis on Thursday showed that German Retail Sales, an important indicator of household consumption, fell 2.0% month-on-month in March. This follows a revised decline of 0.3% in February, previously reported as a 0.6% drop, and comes in well below expectations for a 0.1% decrease.

On a year-on-year basis, Retail Sales also contracted 2.0% in March. Markets had been looking for a 0.5% increase, compared with the prior reading of 0.9% growth, which was revised from 0.7%. The weaker data prompted immediate selling pressure on the Euro.

ECB Poised to Hold Rates, June Hike Expectations Build

The European Central Bank (ECB) is widely anticipated to leave interest rates unchanged at its policy meeting on Thursday, amid what is described as a backdrop of elevated uncertainty. However, rising inflation, attributed in part to energy price volatility stemming from the Iran war, has bolstered expectations for a move at an upcoming meeting.

Economists anticipate a quarter-point hike at the ECB’s June gathering, and, according to Bloomberg, markets now fully price in two further increases before the end of the year.

BoE Expected to Stay on Hold as Markets Watch Bailey

The Bank of England (BoE) is similarly expected to keep interest rates steady at its April policy meeting on Thursday, as it assesses the potential economic impact of the Iran war. Market participants will scrutinize remarks from BoE Governor Andrew Bailey for any indication that additional tightening in borrowing costs could still be on the table.

“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: Role, Policy Tools, and Implications for the Pound

The Bank of England (BoE) is responsible for setting monetary policy in the United Kingdom, with its main objective being “price stability,” defined as maintaining inflation at 2%. The BoE uses adjustments to base lending rates as its primary instrument, influencing the rate at which it lends to commercial banks and the cost of interbank lending. These decisions shape overall interest rates in the economy and, in turn, affect the value of the Pound Sterling (GBP).

When inflation rises above the BoE’s target, the central bank responds by increasing interest rates, raising the cost of credit for households and businesses. Higher interest rates are typically supportive for the Pound Sterling, as they can make UK assets more attractive to global investors. When inflation falls below target and signals slower economic growth, the BoE may lower interest rates to reduce borrowing costs and encourage investment, which is generally negative for the Pound.

Quantitative Easing and Quantitative Tightening Explained

In more extreme economic circumstances, the BoE can implement Quantitative Easing (QE) to boost the flow of credit when the usual interest rate channel is insufficient. Under QE, the central bank creates money to purchase assets, typically government bonds or AAA-rated corporate bonds, from banks and other financial institutions. This policy is generally associated with a weaker Pound Sterling.

Quantitative tightening (QT) is the opposite of QE and is employed when economic conditions are improving and inflation is picking up. In a QT phase, the BoE halts additional bond purchases and stops reinvesting the principal from maturing bonds already held on its balance sheet. This withdrawal of liquidity is usually considered supportive for the Pound Sterling.