Although the latest raft of UK retail sales data proved somewhat mixed this was not enough to stop the Pound Euro exchange rate from rallying solidly.
Markets were encouraged as sales volumes bettered expectations on both the month and the year, indicating continued resilience amongst consumers.
The underlying details of the data were not so encouraging in nature, however, as June’s sales figures saw a downwards revision.
With the squeeze on household finances unlikely to ease significantly in the coming months, in spite of the moderate acceleration in wage growth, consumer spending is likely to remain relatively muted.
As analysts at ING noted:
‘With wage growth likely to float around 2% for the rest of the year and inflation set to inch closer to 3%, disposable incomes will continue to fall. The 10% YoY rise in consumer credit has also kept spending going up until now – that doesn’t look particularly sustainable and is another potential risk to growth in the medium-term.
‘We don’t expect a Bank of England hike this year.’
Further volatility could be in store for the GBP EUR exchange rate if the second estimate of the second quarter UK gross domestic product shows any alteration next week.
If signs continue to point towards a loss of momentum within the domestic economy this could weigh heavily on the appeal of the Pound, particularly if Brexit-based jitters also persist.
Euro Trended Lower as Odds of Imminent ECB Tightening Diminished
The mood towards the Euro, meanwhile, was rather muted as markets braced for the release of the European Central Bank’s (ECB) monetary policy meeting minutes.
Investors hope to see evidence that the ECB is edging closer to tapering its quantitative easing program, given recent signs of strength within the Eurozone economy.
However, after reports emerged that ECB President Mario Draghi is not intending to make any comments on monetary policy at the Jackson Hole symposium the chances of a more hawkish set of minutes diminished.
If policymakers maintain a relatively neutral tone on monetary policy at this juncture the GBP EUR exchange rate could find further support.
On the other hand, if markets see any indication that the central bank is moving towards a tightening bias this may set the Euro on a fresh bullish trend across the board.
Even so, if Eurozone data continues to print positively in the coming weeks this could still limit the downside bias of the single currency, even if imminently policy action remains a relatively slim possibility.
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