This week saw the publication of Britain’s February inflation and retail sales figures, both of which made Pound investors much more optimistic about Britain’s 2017 growth prospects. This has seen EUR GBP fall to its lowest 0.86 reading since the beginning of March.
While the Euro has also strengthened due to lightening concerns about 2017’s general elections across the Eurozone, this week’s UK data has notably shifted the mid to long-term Pound outlook to the upside.
Thursday morning saw the publication of Britain’s February retail sales results. They came in well above expectations in monthly and yearly prints.
Month-on-month retail sales results rose from -0.5% to 1.4%, while the yearly figure improved from 1% to 3.7%. The results were expected to come in at 0.4% and 2.6% respectively.
Analysts had previously been concerned that retail sales were slowing significantly, as lower wage growth indicated citizens would struggle to keep up with rapidly rising consumer prices.
February’s print increased hopes that the drop in retail activity was temporary and that Britain’s key services sector, which makes up a majority of the nation’s GDP, would remain strong throughout 2017.
However, the Office for National Statistics (ONS) and other analysts have advised caution. While February’s figure was better than expected, the three months into February saw the biggest three-month-drop in retail activity since 2010.
The ONS noted that higher prices of fuel and food in particular had left consumers with less disposable income.
As a result, concerns remain that Britain’s retail activity could continue to fall in 2017 as inflation rises and if wage growth continues to slow. This would cause a notable drop in Britain’s yearly Gross Domestic Product (GDP) outlook.
On the other hand, if retail sales continue to beat expectations in the next few months and the sector sees a notable improvement from its late 2016 slowdown, the long-term Pound outlook will remain strong.
This, as well as a higher UK inflation outlook, would bolster hopes for strong economic growth and improve Bank of England (BoE) tightening bets. EUR GBP would likely weaken in the long-term in this scenario.
However, the Euro also has notable upside potential in the year ahead depending on how the political and economic outlook shifts.
For example, if France avoids electing anti-EU Marine Le Pen in April and May’s 2017 French election, the Euro will see most of its recent weakness evaporate as investors drop bets that France could be withdrawn from the Eurozone.
Continued strong performance in the Eurozone economy will also give the Euro notable support, as the European Central Bank (ECB) has recently indicated that downside risks in the bloc are fading. This has bolstered hopes that Eurozone monetary policy could even be tightened in the foreseeable future.
Overall, while the long-term Euro to Pound exchange rate outlook has weakened due to this week’s UK data, the Euro still has potential for major gains in the coming months.
At the time of writing, the Euro to Pound exchange rate trended in the region of 0.86. The Pound to Euro exchange rate trended at around 1.16.
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