Sterling softer against the euro ahead of key inflation data

Sterling softer against the euro ahead of key inflation data

Pound sterling softened against the euro during yesterday’s session, reaching a low of 1.1610 on the interbank which was a two-week low for the pairing. Marginal gains for the euro represented a window of opportunity for euro sellers.

GBPEUR reached a new yearly-high last week but has since dropped back by more than a 1%.

Exchange rates continue to be driven by current and future interest rate policy. Market expectations are for the Bank of England to raise interest rates higher than the European Central Bank and Federal Reserve. The current rate is 5.25% and some predictions for the terminal rate are above 6%, leaving room for another couple of hikes.

Members of the BoE, Fed, and ECB have all stated that future interest rate policy will be determined by economic data.

This morning, German retail sales data confirmed a sharp drop off in retail spending. Year-on-year spending is down 2.2% vs expectations of -1%. Month-on-month spending is down 0.8% vs an expectation of a positive reading of 0.3%.

The German economy is the powerhouse and largest contributor to EU GDP. Therefore, this data will come as a concern to ECB members and may impact future interest rate policy. The euro has weakened and GBPEUR has moved higher following the release.

Later this morning Eurozone inflation will be watched closely by ECB members and commentators. Expectations are for a monthly rise of 0.3% and a yearly rise of 5.3%.

If inflation is higher than expected, the ECB will be under pressure to continue their current rate hike cycle. A lower-than-expected reading may change future policy and lead to a euro sell-off. EURUSD has dropped back in to the 1.08 territory.

Tomorrow will be key for all pairings involving the dollar. Non-farm payrolls (jobs) data will be released, and the consensus is for a rise of 170K vs last month’s reading of 180K. Non-farm payroll is known as the ‘monthly market mover’ so their could be significant volatility throughout the day.