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Pound Euro Exchange Rate to Climb on Brexit Optimism?

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GBP/EUR Exchange Rate Trades Erratically amid Strong UK Retail Sales

The Pound Euro (GBP/EUR) exchange rate is wavering this morning after UK retail sales improved much better than expected. Sales in January climbed 0.5% against an expected -0.3%.

At time of writing the GBP/EUR exchange rate is around €1.1244, relatively unchanged from this morning.

Pound (GBP) Supported by Strong Retail Sales

The Pound is holding onto small gains from better-than-expected retail sales in January. Against an expected second month of declining sales, retail figures came back at a 0.5% improvement after sliding 1.2% in December.

The Office for National Statistics (ONS) reported that despite the soaring cost-of-living crisis, consumers kept spending. Retail sales volumes also beat predictions and climbed 0.5%, but food sales continued to slide. However, the concerning undertone to the data is that when compared to pre-pandemic retail sales levels, the figures are still 1.4% less.

Darren Morgan, ONS Director of Economic Statistics, highlights his concern that the general trend of retail spending is pointing down. He added:

‘After December’s steep fall, retail sales picked up slightly in January, although the general trend remains one of decline. In the latest month, as prices continue to fall at the pumps, fuel sales have risen.

‘Meanwhile, discounting helped boost sales for online retailers as well as jewellers, cosmetic stores and carpet and furnishing shops. However, after four months of consecutive growth, clothing store sales fell back sharply.’

Looking ahead, and Sterling could climb on optimism surrounding the Northern Ireland protocol. With reports of Prime Minister Rishi Sunak arriving in Belfast to sign the negotiated deal, fears of a trade war with the EU are subsiding. A spokesperson for Downing Street said:

‘Whilst talks with the EU are ongoing, ministers continue to engage with relevant stakeholders to ensure any solution fixes the practical problems on the ground, meets our overarching objectives and safeguards Northern Ireland’s place in the UK’s internal market.’

Euro (EUR) Quiet amid a Risk-Off Mood

Meanwhile, the Euro is trading in a narrow range against many of its peers this morning amid a lack of economic data. Rising US-China fears over the shot down spy balloons, and concerns over Russia mounting another offensive, have kept the single currency trading narrowly.

Elevated rate hike bets could be providing modest support for the Euro after a speech from European Central Bank (ECB) Governing Council member Isabel Schnabel. She told Bloomberg reporters that another bold 50bps rate hike will be needed in March. Schnabel also commented on further quantitative tightening could be increased after June amid the risk of underestimating inflation.

Looking ahead, any further news out of China or Ukraine could sway market sentiment, as well as any further hawkish rhetoric around the ECB’s monetary policy.

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