The pound is strengthening on strong growth in UK retail sales

• Sterling outperforms its major peers ca UK retail sales rose at a faster-than-expected pace in August
• Fears that UK inflation will remain persistent have deepened after an acceleration in price pressures from the services sector.
• The Fed is expected to continue an aggressive policy easing cycle.

The British pound (GBP) is performing strongly against its major peers on Friday. The British currency is strengthening as United Kingdom (UK) retail sales data for August came in stronger than expected. Data on retail sales, a key measure of consumer spending, rose at a robust 2.5 percent annual pace, higher than estimates of 1.4 percent and the July print of 1.5 percent. On the month, retail sales rose 1% versus expectations of 0.4% and the 0.5% advance seen in July.

The report showed that households spent heavily on textile clothing and footwear stores and grocery stores, while receipts from other non-food stores declined. Signs of robust demand for durable goods could fuel price pressures, a potential concern after core inflation already came in hotter than expected in August. Persistence of high price growth in parts of the economy prompted the Bank of England (BoE) to leave interest rates unchanged at 5% at Thursday’s policy meeting.

The BoE kept lending rates steady with a split of 8 to 1. Swati Dhingra, the BoE’s foreign policy member, was the only one on the Monetary Policy Committee to vote to cut interest rates by 25 basis points (bps) for the second consecutive time. Investors expected Lt. Gov. Dave Ramsden to vote for a cut as well, but he didn’t.

BoE members also voted unanimously to reduce their government bond holdings by £100 billion over the next 12 months.

Daily Market Reasons: Sterling Strengthens Against US Dollar on Favorable Fed Bets

• Sterling is fresh to a two-year high above crucial 1.3300 resistance against the US dollar (USD) in the London session on Friday. GBP/USD is strengthening as the US dollar faces severe selling pressure amid growing speculation that the Federal Reserve’s (Fed) policy easing cycle will continue into the final quarter of the year. The US Dollar Index (DXY), which tracks the value of the greenback against six major currencies, is breaking below the crucial support of 100.50 and falling to an all-time low of 100.21.
• The Fed kicked off its policy easing cycle on Wednesday with a larger-than-usual rate cut of 50 basis points (bps), pushing interest rates to 4.75%-5.00%. This top rate cut from the Fed was a clear signal that policymakers are more focused on restoring the health of the labor market and confident that inflation will return to the bank’s 2% target.
• According to the CME FedWatch tool, the Fed is expected to further cut lending rates by 75 bps in its remaining two meetings this year, suggesting another 50 bps rate cut is on the way. The tool also shows the probability that the Fed will cut interest rates by 50 bps in November is 43%, up from Thursday’s 37%. Instead, Fed policymakers see federal funds rates heading to 4.4% by the end of the year, a smaller cut than what markets are pricing in.
• Going forward, the next trigger for the pound and US dollar will be preliminary S&P Global PMI data for September due out on Monday.

Technical analysis: Sterling rises above 1.3300

Sterling aims to gain a firm hold above 1.3300 against the US dollar in European trading hours. The short-term outlook for GBP/USD remains firm as it holds above the 20-day exponential moving average (EMA) near 1.3150. Earlier, the cable consolidated after recovering from a corrective move to near the trend line drawn from December 28, 2023 high of 1.2828, from where it made a sharp rally after a breakout on August 21.

The 14-day Relative Strength Index (RSI) is moving above 60.00, suggesting bullish active momentum

Looking to the upside, the cable will face resistance near the psychological level of 1.3500. On the downside, the psychological level of 1.3000 appears as crucial support.