EUR/GBP trades in a tight range on Friday, fluctuating between minor gains and losses as markets show a muted reaction to the latest economic data, with traders remaining focused on geopolitical developments surrounding the US and Iran. At the time of writing, the cross is hovering around 0.8671, broadly flat on the day and on track for a third consecutive weekly decline.
The British Pound is finding support from stronger-than-expected Retail Sales data, while the Euro remains under pressure after Germany’s latest IFO Business Climate Index came in weaker across the board, highlighting deteriorating business sentiment, as rising energy prices and ongoing Middle East tensions weigh on confidence across sectors.
UK Retail Sales data for March pointed to resilient consumer demand. Headline Retail Sales rose by 0.7% MoM, beating expectations of 0.2% and reversing the previous 0.6% decline. On an annual basis, sales rose by 1.7% YoY, easing slightly from 1.8% previously but still above forecasts of 1.3%.
Germany’s IFO Business Climate Index for April fell to 84.4 from 86.3, missing expectations of 85.5. The Current Assessment gauge declined to 85.4 from 86.7, below the 86.2 forecast, while the Expectations Index dropped to 83.3 from 85.9, also coming in under estimates of 85.0.
On the geopolitical front, market sentiment improved somewhat after reports that Iran’s Foreign Minister Abbas Araghchi is expected in Islamabad, raising hopes that diplomatic channels could reopen after stalled talks. However, Iran’s state news agency IRNA said the visit is aimed at discussions with Pakistani officials rather than direct engagement with the US.
Uncertainty remains over whether direct talks with the US will materialize, as the ongoing US naval blockade, which Tehran sees as a key obstacle, continues to weigh on prospects for negotiations. With the Strait of Hormuz still under a dual blockade, risks of oil supply disruptions remain elevated, keeping energy prices high, fueling inflation concerns, and complicating the monetary policy outlook for both the Bank of England (BoE) and the European Central Bank (ECB).
Attention now turns to next week’s policy meetings, where both central banks are widely expected to keep interest rates unchanged. The focus will be on forward guidance, particularly how policymakers assess the impact of elevated energy prices, with markets looking for clearer signals on the interest rate path as traders increasingly price in potential rate hikes.
Inflation FAQs
Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.
The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.
Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.
Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it.
Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.
