The EUR/GBP currency pair extended gains for a second consecutive day, climbing to six-week highs, as concerns over UK stagflation continue to weigh on the British Pound (GBP). Despite stronger-than-expected UK Retail Sales data, Sterling remains under pressure amid cautious signals from the Bank of England (BoE) and weak macroeconomic indicators. In their article, Sean Lawrence from LFtrade walks readers through the nuances of the subject.
EUR/GBP Surges Amid Sterling Weakness
The Euro (EUR) continued to strengthen versus the British Pound (GBP), with EUR/GBP climbing to its highest level since August 7, currently trading near 0.8713. The pair briefly hit an intraday high of 0.8728, reflecting ongoing Sterling weakness driven by concerns about stagnant economic growth, elevated inflation, and a softening labour market in the UK.
Analysts note that the BoE’s cautious monetary policy stance, particularly the decision to hold the Bank Rate at 4.00%, has contributed to the downward pressure on the Pound. The central bank also signaled a slowdown in its quantitative tightening (QT) program, further dampening Sterling sentiment.
UK Retail Sales Show Resilience
The latest UK Retail Sales data for August came in stronger than expected, signaling consumer resilience. Headline Retail Sales rose 0.5% month-on-month (MoM), slightly above the 0.4% forecast and in line with July’s revised 0.5% (down from 0.6%).
Core Retail Sales, which exclude fuel, saw a notable 0.8% MoM increase, well above the 0.3% forecast and double July’s revised 0.4% (from 0.5%). On an annual basis, overall retail sales rose 0.7% YoY, surpassing the 0.6% consensus, while Core Retail Sales climbed 1.2% YoY, outperforming both the 0.8% expected and July’s revised 1.0% (previously 1.3%).
These figures indicate that household spending remains relatively strong, despite high borrowing costs and sticky inflation, highlighting a degree of demand-side resilience in the UK economy. However, analysts caution that revisions to July’s data suggest earlier estimates may have overstated consumer strength.
Stagflation Concerns Persist
Despite the positive retail data, the broader macroeconomic picture for the UK remains concerning. Inflation continues to run high at 3.8% YoY, nearly double the BoE’s 2% target, while Gross Domestic Product (GDP) growth slowed to just 0.3% quarter-on-quarter (QoQ) in the second quarter.
Meanwhile, the UK labour market is starting to show signs of strain, as unemployment rises toward 4.7% and payrolled positions fall. Coupled with persistently high inflation and sluggish economic growth, these trends point to an elevated stagflation risk, which is likely to weigh on Sterling.
In Thursday’s meeting, the Bank of England voted 7-2 to hold the Bank Rate at 4.00%, emphasizing the need to balance inflation control against the risk of a further economic slowdown. The BoE also signaled caution by slowing its quantitative tightening program, highlighting a measured approach to monetary policy normalization.
Fiscal Pressures Add to Sterling Weakness
Adding to the Pound’s pressure, recent UK fiscal figures sparked concerns over public finances. UK 10-year gilt yields rose to 4.7%, a two-week high, following net borrowing of £18 billion in August, well above the £12.8 billion forecast and the highest August borrowing in five years.
The rise in gilt yields reflects investor concerns over fiscal sustainability and adds another layer of pressure on the GBP, reinforcing the EUR/GBP rally. Analysts note that higher borrowing costs and rising yields could dampen economic activity further, contributing to ongoing stagflationary pressures.
Technical Outlook for EUR/GBP
From a technical perspective, EUR/GBP remains bullish in the short term, with the pair holding above 0.8700, a key resistance level. Momentum indicators suggest potential for further upside, especially if Sterling weakness persists amid stagflation fears and cautious BoE policy.
Market participants will closely monitor UK inflation data, GDP growth revisions, and BoE communications for clues on the future monetary policy trajectory. Any indication of continued economic slowdown or inflation persistence could push EUR/GBP higher toward 0.8750 or beyond.
Conclusion
In summary, EUR/GBP has surged to six-week highs, reflecting a combination of Sterling pressure from stagflation risks, a softening labour market, elevated inflation, and cautious Bank of England policy. While UK Retail Sales data show some consumer resilience, the broader economic backdrop remains challenging, and fiscal pressures are compounding Sterling weakness.
Traders and investors will continue to weigh UK macroeconomic data against EUR strength to gauge the near-term trajectory of the EUR/GBP cross, with stagflation concerns remaining a central driver of market sentiment.
