German Retail Sales Drops 1.5% While the EUR/USD Await Euro Area Inflation Data

German Retail Sales Slide in October

German retail sales extended recessionary signals in October, sliding by 1.5% and reversing a 1.2% increase in September. The decline highlighted increasing concerns about Germany’s economic outlook.

According to Destatis,

• Food retail sales increased by 0.1% month-on-month in October.
• Non-food retail trade tumbled by 2.2% compared with September.
• E-commerce and mail-order sales slid by 2.4% month-on-month.
• Retail sales increased by 1.0% year-on-year in October, down from 3.8% in September.

Retail Sales Reignite Recession Fears

October’s retail sales slump reignited investor fears of a prolonged German economic downturn. With private consumption contributing over 50% to the German economy, weak sales threaten growth prospects.

Significantly, the weak October retail sales figures came after Germany’s GfK Consumer Climate Report, which signaled a sharp pullback in private consumption. The report highlighted tumbling income expectations and rising consumers’ willingness to save, driven by concerns about a weaker labor market.

The latest retail sales and consumer sentiment figures paint a gloomier picture of the German economy.

Impact on ECB Monetary Policy

The sharp decline in retail sales and potential for steeper falls in November may fuel speculation about a 50-basis point December ECB rate cut. Deteriorating consumer spending may dampen demand-driven inflation, supporting a more dovish ECB rate path.

However, November’s German inflation figures could temper expectations for a 50-basis point December rate cut. The annual inflation rate increased from 2.0% in October to 2.2% in November, exceeding the ECB’s 2% target. This may empower the hawks to combat calls for a 50-bps rate cut despite weak private sector PMIs, retail sales, and consumer sentiment figures.

The mixed signals will put greater emphasis on the Eurozone’s inflation data.

EUR/USD Reaction to German Retail Sales

Ahead of the retail sales report, the EUR/USD briefly fell to a low of $1.05475 before climbing to a high of $1.05802.

However, following the release of the data, the EUR/USD dropped to a low of $1.05782 before rising to a high of $1.05825. Notably, the EUR/USD avoided a sustained pullback on expectations of higher Eurozone inflation.

On Thursday, November 29, the EUR/USD was up 0.28% to $1.05817.

Up Next

Later today, German unemployment and crucial Eurozone inflation figures will draw interest.

Economists expect Germany’s unemployment rate to remain at 6.1% in November. An unexpected rise in unemployment could further weaken consumer spending and the inflation outlook. A softer labor market may dampen wage growth and consumer demand.

Meanwhile, the Eurozone’s inflation figures will likely dictate December’s ECB interest rate decision. Economists forecast the annual inflation rate to rise from 2.0% in October to 2.3% in November. A higher inflation rate could sink bets on a 50-basis point December ECB rate cut.

Pay attention to how the EUR/USD pair responds to further European economic data releases, such as German unemployment data and Eurozone inflation figures, which could add context to the retail sales slump.