EUR/GBP edges lower despite downbeat UK retail sales

• The Euro slips modestly against the British Pound on Friday, despite a weak UK retail sales print.
• UK retail sales drop 2.7% in May, the sharpest monthly fall since December 2023.
• EUR/GBP trades near 0.8530, pulling back slightly from recent two-month highs.

The Euro (EUR) edges lower against the British Pound (GBP) on Friday, unable to capitalize on disappointing UK retail sales data released earlier in the day. However, the British Pound remains resilient, still drawing support from the Bank of England's(BoE) decision to keep its key interest rate unchanged on Thursday, which has helped anchor expectations for a cautious policy path ahead.

The EUR/GBP cross has been trading on the front foot for the past two weeks, buoyed by renewed Euro demand and mixed UK fundamentals. At the time of writing, the pair is changing hands near 0.8530 during the American trading hours, slipping from its strongest levels in nearly two months.

While the broader bias remains tilted to the upside, some near-term profit-taking and a resilient British Pound could cap further gains in the coming days.

Fresh data from the UK Office for National Statistics revealed that retail sales volumes decreased by 2.7% in May, marking the steepest monthly decline since December 2023 and significantly worse than the modest 0.5% drop economists had anticipated. The contraction was broad-based, with households cutting back on food, clothing, and household goods as persistent inflation and higher borrowing costs continued to squeeze budgets. On a yearly basis, sales fell 1.3%, erasing April's robust 5% gain and underscoring the fragile state of UK consumer demand heading into the summer.

On the Euro front, the currency continues to navigate a delicate balance between softening inflation and a still‑strong exchange rate. Recent comments from European Central Bank officials, including Villeroy de Galhau and Luis de Guindos, have reinforced expectations for additional rate cuts this year as inflation eases across the bloc. Notably, Eurozone headline inflation dipped below the ECB's 2% target in May for the first time in months, while core inflation also edged lower, giving policymakers room to maintain a cautious easing path. However, the Euro's resilience against the US Dollar (USD) and other majors complicates the outlook, as a stronger currency can dampen imported inflation and slow economic momentum.

Looking ahead, traders will focus on Monday's flash Purchasing Managers' Index (PMI) data from both the Eurozone and the UK for fresh clues on economic momentum. Any surprise weakness could shift expectations for the next moves from the ECB and the BoE, adding volatility to the EUR/GBP cross early next week.