Euro Eases From Highs as Data and ECB Signals Diverge

Key Moments

EUR/GBP Pulls Back After Four-Day Advance

EUR/GBP is trading lower on Friday, reversing a four-session climb that had lifted the cross above 0.8600 to its highest level since July 1. The move comes as softer Eurozone Retail Sales data weighs on the Euro, while earlier hawkish commentary from the Bank of England’s (BoE) Chief Economist lends some underlying support to the Pound.

At the time of writing, EUR/GBP is hovering near 0.8590, down roughly 0.10% on the day.

Eurozone Retail Sales Miss Expectations

Latest figures show Eurozone Retail Sales falling 0.6% month-on-month in July, sharply undershooting expectations for a 0.3% increase and overturning the prior month’s 0.2% gain. On a year-on-year basis, sales rose 0.6%, below the 1.1% consensus forecast and decelerating from 1.4% previously.

The weaker data have modestly undermined the Euro, contributing to the pullback in EUR/GBP after the recent rally.

BoE Comments and Policy Outlook

BoE Governor Andrew Bailey spoke on Friday but did not provide a new signal on the next interest-rate move. Bailey said policymakers have some choice over the pace at which inflation returns to target, but underscored that it must do so. He also noted that high debt levels mirror substantial challenges facing governments and are adding pressure on bond markets.

Support for the British Pound has been underpinned by remarks from BoE Chief Economist Huw Pill on Thursday. Pill repeated his backing for raising the Bank Rate to 4%, arguing that a “prompt increase in Bank Rate may head off some potential insidious catch-up dynamics.”

ECB-BoE Policy Divergence Shapes EUR/GBP

Analysts see the downside in EUR/GBP as limited, with markets anticipating that the European Central Bank (ECB) and the BoE will take different policy paths at their upcoming meetings this month. Broader worries over the UK fiscal outlook could also restrain investor appetite for Pound Sterling.

The ECB is widely expected to deliver a second rate increase this year at its September 9-10 meeting, as policymakers react to inflation risks associated with higher Oil prices amid tensions in the Middle East. By contrast, the BoE is expected to keep the Bank Rate unchanged at 3.75% on September 17. This prospective policy divergence is seen as supportive for the EUR/GBP cross, while ongoing concerns about the UK’s fiscal position may further cap demand for the Pound.

Rabobank Sees Structural Pound Vulnerability

Rabobank strategists highlight what they view as a structural disadvantage for the Pound relative to many other G10 currencies. They point out that “GBP does not have this advantage” of a lower foreign ownership share in its government bond market. According to them, “the proportion of UK government debt owned by foreign investors is relatively high compared with other G10 countries,” which they believe “increases the likelihood that any gilt market jitters will also be reflected in a weaker pound.”

Looking ahead, the bank emphasizes the importance of the upcoming fiscal event for Sterling performance, 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.” Rabobank adds 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.”