Sterling gains further ground as UK retail sales rise as expected

• Sterling is showing strong strength against the US dollar on several tailwinds.
• Healthy growth in UK retail sales could dampen bets for a second consecutive BoE interest rate cut.
• The US dollar is struggling to hold on to Thursday’s rally, which was driven by upbeat economic data.

The British pound (GBP) outperforms its major performers, excluding Asia-Pacific currencies, in the London session on Friday. The British currency is gaining significantly as the Office for National Statistics (ONS) in the United Kingdom (UK) reported that retail sales rebounded in July as expected after contracting sharply in June.

The report showed that monthly and annual retail sales rose 0.5 percent and 1.4 percent, respectively. According to the report, receipts at department stores and sports equipment stores rose strongly, with retailers suggesting that summer sales and sporting events such as the European Football Championship boosted sales. On the contrary, demand for automotive fuel contracted sharply.

Retail sales are a key measure of consumer spending. Strong consumer demand tends to fuel inflationary pressures in the economy, so the data could ease expectations that the Bank of England (BoE) will opt for another rate cut in September. The BoE began cutting its key lending rates in the first week of August, but the move to cut the rate was a tough call with the vote split 5-4.

The BoE’s next monetary policy meeting in September could also be a tough call. Inflation in the UK services sector fell sharply in July as the pace of wage growth slowed. However, the latest labor market data also showed that the unemployment rate has surprisingly fallen and that the economy is clearly on an expansionary path.

Daily market reasons: Sterling refreshes two-week high against US dollar

• Sterling hits a new two-week high at 1.2885 against the US dollar (USD). GBP/USD is strengthening as the US dollar eases slightly in European trading hours on Friday after a sharp recovery on Thursday. The US Dollar Index (DXY), which tracks the greenback against six major currencies, is near 103.00 after recovering from a 10-day low of 102.27.
• The US dollar’s rally was driven by robust growth in monthly United States (US) retail sales for July and below-expected weekly jobless claims. Upbeat US data eases fears of a recession, dashing expectations for an aggressive policy/easing response from the Federal Reserve (Fed) in September.
• According to the CME FedWatch tool, 30-day Federal Finds Futures price data showed the probability of a 50 basis point (bps) interest rate cut fell to 29.5% from 51% a week ago. Even though market speculation for big interest rate cuts has eased significantly, expectations for a dovish decision in September remain firm.
• A lower number of Americans claiming jobless benefits for the first time in a row for two weeks suggests that labor market conditions are not as bad as non-farm payrolls (NFP) data for July suggest. Official employment data showed weak demand for work and a sharp rise in the unemployment rate.
• Meanwhile, Fed policymakers are also signaling that they are comfortable with interest rate cut expectations. On Thursday, the president of the Federal Reserve in St. Louis, Alberto Musalem, said: “The time may be approaching when an adjustment to a moderately restrictive policy may be appropriate.” Asked about current job market conditions, he said “the job market is no longer overheated.”

Technical Forecast: Sterling is approaching 1.2900

The British pound is nearing 1.2885 against the US dollar. GBP/USD is extending an uptrend that started from a six-week low of 1.2665 after a positive divergence formation on a daily time frame, where the pair continues to make higher lows, while the oscillator of momentum makes lower lows. This generally leads to a resumption of the uptrend, but should be confirmed with more indicators.

The 14-day Relative Strength Index (RSI) is recovering after finding a cushion near 40.00, showing signs of buying interest.

On the other hand, the psychological figure of 1.3000 and the yearly high of 1.3044 will act as major resistances for the pound sterling. Alternatively, the recovery move could weaken if the asset breaks below the August 8 low at 1.2665. This would expose the asset to the June 27 low of 1.2613, followed by the April 29 low of 1.2570.