The euro edged higher against the pound in European trading on Monday (November 2nd), currently trading around 0.8345. The euro's gains were limited after weak German retail sales data, but it did not turn negative. Stronger-than-expected third-quarter GDP data from the Eurozone and Germany provided support for the euro. Data released by the German Federal Statistical Office on Monday showed that retail sales fell 2.0% month-on-month in September, compared to a 1.2% increase in August (revised from 1.3%), far weaker than the market expectation of a 0.4% increase. Year-on-year, retail sales fell 2.3% in September, compared to a 0.3% decrease in the previous month (revised from -0.4%). Retail sales are a key indicator of consumer spending, and this data points to a significant weakening of German consumption in September, but failed to reverse the slight gains in the euro against the pound.

The Bank of England's decision on Thursday: a rate hike to 4.0% is a certainty; the key lies in the wording.

In the UK, the Bank of England's interest rate decision will be the focus on Thursday. Economists surveyed by the media expect the Bank of England to raise interest rates from 3.75% to 4.0% at its November policy meeting, which would be the first rate hike since August 2023. Alexander Harvey, a UK economist at Oxford Economics, said: "While we don't expect the committee to give clear guidance on how many rate hikes it plans to raise, the meeting minutes or Governor Bailey could signal that interest rates are unlikely to reach levels priced in by the financial markets."

UK Budget and Bourgeois Risk Premium: Medium-Term Support for the Pound

ING analysts point out that UK interest rates still carry a "20 basis point risk premium in the 10-year UK gilt yield," and interest rate strategist Michiel Tukker believes that "this premium could be squeezed out of the market during today's UK budget release." They argue that the budget itself "is not expected to have a significant impact on the Bank of England's tightening outlook," but warn that "any upward surprise in the minimum wage adjustment could be transmitted to the money market in a hawkish manner." The bank also notes cross-market implications: "Some narrowing of the spread between gilt and German bonds today may remind the market that the UK appears to be one of the few G7 economies on the right fiscal direction heading into 2027," predicting that "the budget deficit will fall below 4% of GDP as higher inflation pushes more taxpayers into higher tax brackets." In the currency market, the bank observes that "the euro/pound is holding above the 0.8350 support level, but the trend is bearish." Unless "there are any unexpected distributions in the budget that impact gilts," the bank expects "the euro/pound to remain bearish and may test the 0.8315 area."

ECB's hawkish tone: Nagel warns of rising inflation, supporting the euro.

European Central Bank (ECB) policymaker Nagel pledged that the ECB "will take decisive action if necessary to bring inflation back to target," reinforcing expectations that policy tightening remains on the table. Nagel emphasized that consumer price growth has accelerated again and further price increases "cannot be ruled out," highlighting concerns about persistent inflationary pressures. He cited higher energy costs as a major driver, supporting a hawkish bias in the euro – if inflation fails to ease, the market may price in a higher probability of restarting or extending restrictive policies.

in conclusion

German retail sales fell 2.0% month-on-month in September, far weaker than expected, limiting the euro's gains. However, stronger-than-expected third-quarter GDP figures for both the Eurozone and Germany kept the euro slightly higher against the pound. In the UK, a rate hike to 4.0% on Thursday is expected, with the key focus on whether the meeting minutes and Bailey's remarks signal that "interest rates will not reach market-priced levels." The UK budget may squeeze out a 20-basis-point risk premium on gilts, providing medium-term support for the pound. Institutions expect the euro to remain under pressure against the pound, potentially testing 0.8315, but ECB President Nagel's hawkish comments provide marginal support for the euro. In the short term, the pair is narrowly stronger due to the balance of power between bulls and bears. (Euro/Pound Sterling daily chart, source: FX678) At 15:32 Beijing time, the euro was trading at 0.8344/45 against the pound sterling.