The Euro (EUR) extended its losses against the British Pound (GBP) for the fourth consecutive day on Wednesday, reaching fresh two-week lows below 0.8560 and accumulating a 0.4% decline so far this week. This movement was driven by disappointing German retail sales data and a positive revision to UK GDP figures. German retail sales contracted 0.4% in August after a 2.5% fall in July, with the year-on-year reading showing a 1.3% rebound after dropping 3.4% in the previous month, but still falling short of the 2% gain anticipated by the market [1]. However, Source 2 reports that German retail sales rose 1.3% month-on-month in August, while the annualized basis saw a decline of 0.4%, compared to a prior release of a fall of 2.5% [2]. According to [1], the UK’s Q2 GDP was revised to 0.5% growth from previous estimates of 0.4%, and the year-on-year reading to 1.4% from 1.2%. The UK Current Account deficit narrowed to GBP 19.932 billion in Q2 from GBP 21.12 billion in Q1, against expectations of a widening shortfall to GBP 25.6 billion [1].
Market reaction to the German retail sales release was mixed. While the EUR/GBP pair continued to decline, the EUR/USD pair edged slightly higher, up 0.07% on the day at 1.1348 following the data [2]. The Euro remains weighed down by high oil prices and concerns over France’s public debt, with Brent Oil retreating below $96.00 from Tuesday’s highs above $101.00, providing some relief to Eurozone oil-importing economies. France’s public debt reached EUR 3,596 trillion in June, or 119% of GDP, its highest level since 1946. The gap between French and German debt yields jumped to 115 basis points, the largest since 2012, raising fears of another credit crisis in the Euro Area [1].
In the broader currency market, the GBP/USD pair weakened below 1.3250, with technical barriers sustaining a bearish bias. Surging US Treasury yields and the hawkish stance of the Federal Reserve provided support to the US Dollar (USD) against the GBP. Markets are pricing in a 47.1% chance of a Fed rate hike in October and a 92.5% chance in December, according to CME's FedWatch Tool [3]. Analysts at HSBC warn that weak UK labor demand and sluggish private sector momentum could weigh on the GBP in the near term, especially as the US economy appears more resilient. They note that higher energy prices create a difficult policy mix for the UK, with inflation risks rising even as growth momentum faces challenges. The upcoming UK budget update on 28 October may add further pressure, with elevated gilt yields and difficult fiscal choices ahead [3].
Fed officials, including Chicago Fed President Austan Goolsbee and Fed Governor Michael Barr, emphasized the risks of persistent inflation and the likelihood of further rate increases. Goolsbee highlighted the danger of overheating due to expectations of AI-driven productivity gains and prolonged overshooting of the inflation target, reinforcing a hawkish Fed tone. The FXS Fed Sentiment Index rose by 1.01 points to 145.30, signaling heightened concern about inflation and a bias toward keeping policy restrictive for longer [3].
CONCLUSION
Disappointing German retail sales and concerns over Eurozone debt have pressured the Euro, while a positive UK GDP revision and narrowing current account deficit have provided some support to the Pound. However, the GBP remains vulnerable amid weak labor demand and challenging fiscal outlook, especially as the US Dollar strengthens on hawkish Fed signals. Overall, the market sentiment is cautious, with medium impact expected as investors weigh economic data and central bank policy outlooks.