GBP in Euro: What is moving the EUR/GBP quotes below 0.8660 awaiting Eurozone inflation

Economic Data from Germany Weighs on the Euro

The EUR/GBP exchange rate reached 0.8655 in the early stages of Wednesday’s European session, reflecting a weakening phase of the single currency. The British Pound gained ground against the Euro following the release of new economic indicators from Germany that did not meet expectations.

Germany’s Federal Statistical Office Destatis reported a -0.6% month-on-month decline in retail sales for November, a sharper decrease compared to -0.3% in October and well below market forecasts of a 0.2% increase. Year-over-year, sales increased by 1.1%, slightly higher than the previous +0.9%. This disappointment on the consumption front exerted pressure on the Euro’s quotations, fueling the downward movement of the EUR/GBP pair.

Eurozone Inflation in Focus: Investors’ Expectations

During today’s session, the main focus is on the flash reading of the Eurozone Harmonized Index of Consumer Prices (HICP). Market participants are closely watching this data, aware that a result above estimates could limit further declines of the euro in the short term.

The European Central Bank is expected to keep interest rates unchanged; however, some analysts do not rule out the possibility of future cuts if the economic scenario deteriorates significantly. A more robust-than-expected inflation could strengthen the narrative of a less accommodative monetary policy, providing an anchor for the euro’s quotations.

Bank of England and the Prospects of Easing: Support for the Pound

The Bank of England’s Monetary Policy Committee has signaled a gradual easing of policy, with future decisions contingent on the evolution of inflation, wage dynamics, and prices in the services sector. According to financial market quotes, traders anticipate at least one rate cut in the first half of the year, while a second reduction by the end of the year is priced in with a probability close to 50%.

This more cautious and selective stance of the UK central bank, compared to a potential continuation of ECB rate hikes, represents a potential support element for the Pound against the Euro. The differing dynamics between the two monetary policies could continue to negatively influence the EUR/GBP pair toward levels of 0.8650 and beyond.