EUR/GBP attempts a break below 0.8600 as UK Retail Sales remain upbeat

• EUR/GBP has tested territory marginally below 0.8600 on upbeat UK Retail Sales data.
• Monthly UK Retail Sales have expanded by 0.3% while the street was anticipating a contraction of 0.2%.
• An interest rate hike by the ECB in July is likely confirmed while investors are uncertain about the September meeting.

The EUR/GBP pair is looking to deliver a break below the crucial support of 0.8600 as the United Kingdom Office for National Statistics has reported upbeat Retail Sales (May) data. Monthly economic data has expanded by 0.3% while the street was anticipating a contraction by 0.2%. The pace of expansion remained lower than the prior speed of 0.5%.

Annualized Retail Sales contracted by 2.1% but remained better as investors were hoping for a contraction of 2.6%. It looks like higher payouts offered by firms to offset labor supply shortages have equipped households with higher liquidity for disposal. Solid retail demand would fuel inflationary pressures and might force the Bank of England (BoE) to further policy tightening.

On Thursday, the Bank of England (BoE) hikes interest rates unexpectedly by 50 basis points (bps) to 5% while the street was anticipating an increase of 25 bps. No doubt, the risk of a fat rate hike by the BoE was sufficient as inflationary pressures for May in the UK turned out extremely persistent.

May’s inflation data remained hotter than expected as labor market conditions were tightened further and food price inflation is not peaked yet. Meanwhile, UK’s core inflation has printed a fresh new high of 7.1%, which has tilted expectations of market participants in favor of a fat interest rate hike from the central bank.

Also, in Eurozone, the European Central Bank (ECB) is worried about the persistence of core inflation. Adding to that, headline inflation is thrice the required rate of 2%, which is keeping chances of more rate hikes in July alive. However, uncertainty is stemming from the September meeting. ECB policymaker Peter Kazimir said on Wednesday that he is not certain whether the central bank will continue its rate hike cycle in September. He further added we would need to have core inflation under control to stop tightening.