The euro edged lower against the pound after three consecutive days of gains, trading around 0.8590 in the European session on Friday (September 18). The pair faced downward pressure as the pound gained momentum following better-than-expected UK retail sales data. The pound's strength directly weighed on the euro/pound exchange rate, preventing the previous three-day rebound from continuing.

UK retail sales: up 0.5% month-on-month, far exceeding expectations, and up 2.4% year-on-year.

According to the UK Office for National Statistics, retail sales rose 0.5% month-on-month in August, successfully rebounding from a 0.5% decline in July and easily exceeding market expectations of a 0.2% drop. Year-on-year growth was 2.4%, exceeding the expected 1.9% and the revised 1.2% of the previous month. This significantly stronger-than-expected data indicates a recovery in UK consumer spending momentum, providing direct support for the pound. The rebound in retail sales eased market concerns about weak UK consumption and further complicated the Bank of England's trade-off between inflation and growth.

German producer prices rose 4.6% year-on-year, the fastest pace since April 2023, marking the fifth consecutive month of increases.

German economic data highlights escalating wholesale inflationary pressures. Producer prices rose 4.6% year-on-year in August, higher than the expected 4.1% and accelerating from 3.0% in July. This marks the fifth consecutive month of producer price inflation and the fastest annual rate since April 2023. Month-on-month growth was 1.1%, unchanged from July, maintaining the fastest expansion in three months and far exceeding analysts' expectations of 0.4%. The acceleration in German producer prices reflects the continued transmission of energy and intermediate goods cost pressures, but failed to offset the support for the pound from stronger UK consumer spending momentum.

Eurozone Industry: Growth for the fourth consecutive month, supported by comparative advantage and defense spending.

Economists from a prominent institution pointed out that Eurozone industrial production, after a weak start to the year, has grown for four consecutive months despite the Middle East crisis and higher energy prices. They believe the rebound is supported by Europe's comparative advantage over Asia, which has contributed to the surprisingly resilient production recovery. Furthermore, the institution noted that additional defense spending efforts have provided more structural support to certain manufacturing sectors, reinforcing the output improvement along with early signs of resilience in capital goods and energy, as well as initial improvements in manufacturing sentiment. This industrial recovery has provided some fundamental support for the euro but failed to offset the strength of the pound following the retail sales data.

In summary: The pound sterling has an advantage in the short term, but German producer prices and the Eurozone industrial recovery are medium-term variables.

In summary, the euro retreated against the pound after three consecutive days of gains. The pound strengthened due to better-than-expected UK retail sales, but German producer prices, which rose at their fastest pace since April 2023, failed to offset the pound's momentum. Eurozone industrial growth for four consecutive months, comparative advantage, and defense spending provide medium-term support. For the euro/pound exchange rate, the pound is favored in the short term, but accelerating German producer prices and the Eurozone industrial recovery may provide support for the euro in the medium term. Going forward, attention should be paid to whether the momentum in UK retail sales can be sustained, the transmission of German producer prices to consumer prices, the sustainability of the Eurozone industrial recovery, and the differences in policy paths between the Bank of England and the European Central Bank. (Euro/Pound Sterling daily chart, source: EasyTrade) At 15:13 Beijing time, the euro was trading at 0.8586/87 against the pound sterling.