Positive Retail Sales Temporarily Lifts the Pound

GBP/USD Rate, Charts and Analysis:

Read more: Dollar Index (DXY) eyes deeper recovery as USD/CHF hits 12-year lows

The British pound saw a decline on Wednesday extending into Thursday on the back of a strong dollar as market participants stand ahead of next week’s Federal Open Market Committee meeting. The US dollar is facing some serious resistance while positive UK retail sales data this morning may keep the pound higher in the short term.

UK retail sales and US labor markets data

UK retail sales surprised to the upside this morning in what is likely to be a positive sign for the Bank of England (BoE) as it looks to raise interest rates at its September meeting. A positive retail sales reading will reinforce the notion that UK consumers can make do with higher rates while still fighting inflation. There were positive signs this week regarding UK inflation, but much remains to be done with UK Chancellor Hunt stating that the UK will start to see results if it sticks to its inflation halving plan. The British Retail Consortium measured retail spending in June at 4.9% higher year on year as demand for barbecue food and garden furniture soared as the UK, like Europe, faced one of the hottest months on record.

*Figure 1 shows the persistent divergence between the quantity purchased (volume) and the amount spent (value) in retail sales over time due to price increases.

Source: Monthly Business Survey, Retail Sales Inquiry from the National Bureau of Statistics

US labor data remained strong yesterday adding the stamp of approval for a 25 basis point hike next week from the US Federal Reserve. However, the question on everyone’s lips, is where will the Fed rates lead? For now, the consensus seems to be for a 25 basis point hike next week before another pause. I had hope that the Fed would take a real big surprise and do something it hasn’t done before and choose to hike 10-15 basis points lower. However, the Fed has historically chosen to raise interest rates in increments of 25 to 50 basis points which makes such a move more controversial.

Doubtful rhetoric and a 25bp rally next week could leave the USD vulnerable to further losses and could work in favor of further upside for the Pound.

For all the economic data and events that move the market, see DailyFX calendar

Technical outlook and final thoughts

GBPUSD has been falling since it rebounded to a year-to-date high on July 13. This morning’s bounce would be welcome as GBPUSD looks to break a 5-day losing streak. Sterling found support at the June 16th swing high around the 1.2850 handle with the uptrend line below and could provide dynamic support if we see more downside.

Looking at the overall macro picture, we could be heading lower ahead of the upcoming FOMC meeting and before the Bank of England (BoE) in early August. With market participants taking a pause from the Fed after next week’s meeting and the Bank of England looking set to deliver at least two additional hikes, the medium-term outlook for Cable looks promising. Any attempted pullback towards the uptrend line should spark potential due to the different confluence formation. The 50 days moving average provides further support which is currently hovering around the 1.2658 mark with daily candle closing below the 1.26000 mark invalidating the bullish trend.

Key levels to watch out for:

Support levels:

• 1.2850
• 1.2700
• 1.2658 (50-day moving average)

resistance levels:

• 1.2900
• 1.3000 (psychological level)
• 1.3150 (YTD high)

GBP/USD daily chart

Source: TradingView, prepared by Zain Fouda

Customer Sense Data IG

IGCS shows that retail traders are currently short GBPUSD, with 54% of traders currently holding short positions. At DailyFX, we usually take a view contrarian to crowd sentiment, and the fact that short traders are suggesting that GBPUSD may enjoy a brief pullback before continuing to head higher towards the psychological 1.3000 level.

— Written by Zain Fouda L DailyFX.com

Connect with Zain and follow her on Twitter: @employee