EUR/GBP traded sideways near 0.8700 during Asian hours on Thursday, following gains in the previous session, as investors awaited the release of Eurozone Retail Sales data later in the day [1]. Market expectations are for Eurozone Retail Sales to increase by 1.7% year-on-year in January, up from a 1.3% rise in December, while the monthly figure is forecast at 0.3%, compared to a 0.5% decline previously [1].
European Central Bank (ECB) Governing Council member and Bank of France Governor François Villeroy de Galhau stated that the ECB is closely monitoring energy markets amid the ongoing Middle East war, noting that the conflict's duration will determine its impact on prices. Villeroy sees no current reason for the ECB to raise interest rates [1]. ECB policymaker Martins Kazaks echoed this sentiment, suggesting the central bank should 'sit tight' and keep rates steady due to uncertainty surrounding the Iran conflict [1]. Despite these comments, surging oil and gas prices have revived inflation concerns, leading some traders to price in the possibility of an ECB rate hike this year [1].
In the UK, there are potential stagflation risks as higher energy costs could push inflation higher while growth and employment remain subdued. The UK, being a major energy importer, is particularly vulnerable to rising prices, which may keep inflation above the Bank of England's (BoE) 2% target for an extended period. UK headline inflation eased to 3% year-on-year in January [1].
CONCLUSION
EUR/GBP remains stable ahead of key Eurozone Retail Sales data, with market participants closely watching energy prices and central bank policy signals. While ECB officials advocate for steady rates amid geopolitical uncertainty, inflation concerns persist due to rising energy costs. The UK faces stagflation risks, potentially keeping inflation above target, which could influence future monetary policy decisions.