By: Fiona Cincotta, Senior Market Analyst
German retail sales fell 3.4% in July against expectations of a 0.4% increase, the sharpest decline in four years. That single data point explains more about the euro's recent weakness than the eurozone inflation print sitting alongside it. Eurozone inflation rose to 3.3% year on year in August, its highest level since September 2023 and well above the European Central Bank's 2% target, which would normally support the single currency. Instead, the euro is under pressure, because the market is weighing a deteriorating demand picture against a hawkish rate path and finding the demand picture heavier.
Fiona Cincotta is a StoneX Senior Market Analyst with more than 15 years of experience trading and analyzing UK, European and U.S. markets, working across foreign exchange, equities and commodities with both fundamental and technical analysis. She follows UK and European macro themes closely, including the consumer and demand data that feeds into European Central Bank policy expectations.
German retail sales dropped 3.4% in July, when the consensus expected a 0.4% increase, a miss wide enough to change the reading of the eurozone economy rather than merely soften it. Germany is the bloc's largest economy, so a consumer that pulls back there is a demand signal for the whole currency area. Cincotta calls it "the sharpest decline in four years, and it definitely raises concerns over the strength of the German consumer, particularly at a time when the ECB is considering moving interest rates higher". That timing is the problem, specifically because tightening into a contracting consumer raises the cost of the policy rather than its credibility. For anyone positioned in the euro, it means the rate path that markets are pricing carries execution risk that the inflation number alone does not show.
Markets are pricing roughly an 80% probability of a second European Central Bank rate hike following a September move, and the euro has fallen anyway. Conversely, that is not a contradiction, it is a ranking, with the growth channel currently outweighing the rate channel in how the single currency is valued. Higher energy costs sharpen the split, since rising crude prices import inflation into Europe while simultaneously squeezing the same consumers and businesses the retail data has already flagged. The result is a currency being pulled in two directions at once by the same set of numbers. As Cincotta puts it, "the euro here is really caught between two forces, higher inflation is pushing the ECB to tighten policy, whilst weaker growth makes aggressive rate hikes increasingly difficult".
--- Written by Frédéric Guétin, StoneX Media Producer
--- Expert: Fiona Cincotta, StoneX Senior Market Analyst
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