GBPEUR Heads Lower After Data, BoE Comments

GBP EUR Trades Above 1.18 After Weak ZEW Data

The GBPEUR exchange rate was lower on Thursday after a set of economic data from Europe. The German and Eurozone economies saw PMI data marked higher alongside a recovery in German retail sales. Bank of England governor Andrew Bailey also warned traders not to over-react to the recent inflation jump.

The GBPEUR is trading above 1.1620 and is at risk of further losses this week with no more data on Friday.

German retail sales recover in May

German retail sales saw a rebound in May as a gradual easing of coronavirus restrictions supported consumers in Europe’s largest economy, according to data on Thursday.

Retail sales were 4.2% higher on the month after a downward revision of 6.8% in April, The Federal Statistics Office said. The May reading was still lower than a Reuters forecast for a rise of 5.0%.

For the year, retail sales fell 2.4% in real terms following an increase of 5.1% in the previous month. The data is a boost for the country’s hospitality and retail sectors after the months of lockdown and could support hiring.

PMI data was also marked slightly higher with German manufacturing at 65.1 versus 64.9. Eurozone manufacturing was also marked higher by a smaller 63.4 versus the 64.1 that markets had expected. Data for the UK went the other way with a downward revision to 63.9 from the 64.2 level first stated.

BoE still sees temporary inflation bounce

The Bank of England’s Governor Andrew Bailey said on Thursday that markets shouldn’t over-react to a rise in inflation that will likely prove to be temporary during Britain’s economic recovery.

Repeating the same the message from the bank’s recent policy meeting, Bailey said that the bank’s belief in temporary inflation was “well-founded”.

“It is important not to over-react to temporarily strong growth and inflation, to ensure that the recovery is not undermined by a premature tightening in monetary conditions,” Bailey said in an annual Mansion House speech.

However, Bailey added that the BoE would watch carefully for signs of more persistent inflation and act accordingly.

“And if we see those signs, we are prepared to respond with the tools of monetary policy,” he said.

The price of sterling fell on the comments as the chances of a rate hike fade. British consumer prices jumped to 2.1% in May, topping the BoE’s 2% target for the first time in two years.

Last week, the central bank said inflation would surpass 3% but the outgoing Chief Economist has said that 4% is possible. Higher energy prices and supply chain shortages were seen as the drivers of the recent inflation jump and traders looked for the bank to exit stimulus measures sooner than the bank had previously expected.

The GBPEUR was rejected two weeks in a row at the 1.17 level and may try to test the 1.16 level again.