Sterling drops from 7-year high, as German economy booms

The UK pound has slid –0.59% versus the euro today to just 1.3735.

by Sam Hewitt

The UK pound has slid –0.59% versus the euro today to just 1.3735, more than half a cent below yesterday’s 7-year high year.

This is chiefly because Germany’s economy is showing signs of positively booming, with retail sales flying. Meanwhile, Britain’s forthcoming general election in May is weighing on the UK economy.

Euro climbs, as German retail sales rocket

Sterling has weakened today, first because sales in Germany’s shops flew +5.3% in January year-on-year, according to official body Statistisches Bundesamt Deutschland, far exceeding +2.7% forecasts.

This was the quickest rise since January 2008. and comes as little surprise given the inflation-busting wage hikes that German workers have been enjoying. Recently for instance, Germany’s largest union IG Metall negotiated a +3.4% pay rise for its members, at a time when inflation is falling.

Christian Schulz, senior economist at Berenberg Bank notes that "Private consumption looks set to be a major growth driver in 2015” in Germany. Hence, the rising euro today.

Pound falls, as election uncertainty weighs on UK construction firms

Meanwhile, sterling remains on the back foot today, because it seems that election uncertainty is keeping UK construction firms from hiring and investing, in spite of faster growth in February.

UK construction expanded 60.1 last month, according to economics body Markit’s measure of growth, faster than 59.0 forecasts, and a 4-month. With Markit, a figure above 50.0 points to expansion, while anything below means contraction. This suggests that UK construction is reviving at the start of 2015, and as Markit economist Tim Moore notes, “growth picked up further from the soft patch seen at the end of 2014.”

However, the pound failed to benefit from UK construction’s renewed growth, because there are signs that builders are holding back, ahead of the UK’s May general election. For example, Markit’s Tim Moore also added that “some construction companies noted that the uncertain general election outcome could prove a temporary bump in the road for new work."

Moreover, UK construction accounts for just 6% of Britain’s economic output, a very small percentage, which also explains why sterling remains lower today.