The EUR/GBP exchange rate has instead gone the other way, trading around 0.8530 during American trading hours on Friday. This retracement follows two weeks of Euro strength. Around that time, demand bounced back in the context of a largely positive economic picture, albeit with some clouds, from the U.K. Combined with today’s disappointing retail sales self-report – a 2.7% drop in sales for May – the worst month-over-month decline since December 2023. Even with this bad news, the Euro could hardly muster a move.
So, it’s been a combo of last two weeks increasing Euro demand momentum pushing up EUR/GBP. This increase has developed during a period where the UK’s economic fundamentals remain shrouded in uncertainty. New released data for UK retail sales have revealed an alarming decline in sales, down 1.3% from last year. This decrease pretty much erases the really great 5% increase from April. The fall in consumer spending adds to fears over the UK economy’s weakness. It creates negative market sentiment toward the British Pound as well.
The British Pound has performed surprisingly well. Perhaps the greatest source of this strength is the Bank of England’s resolve to hold their key interest rate steady at last week’s monetary policy meeting. This decision has set in stone expectations for a dovish course moving forward. The profound effect of this has been to keep the Pound exceptionally strong against the Euro.
Currently, EUR/GBP is quoted a little around 0.8530 after coming off its peak in almost two months. The past week’s drop signals that speculators are cashing in on profits. After two weeks of a Euro that has been good to institutional traders, they have begun to take profits, rolling back their bets in the market. As such, the broader bias for EUR/GBP is upward. Yet, the strength of the British Pound and continued profit-taking will likely prevent additional increases over the next few days.
Traders and analysts have been closely monitoring the developments. They are putting the UK’s economic fundamentals—and there are things to like about them—in direct opposition to the broader European market sentiment. As the week progresses, market participants will be watching the incoming Eurozone economic indicators with a hawkish eye. They’ll be looking out for any further signals from the Bank of England that may affect exchange rate expectations.