GBP/USD Forecast: Upside open, but risk of weak UK retail sales

The GBP/USD pair clocked a high of 1.5248 (50% of Apr-Jun rally) on Wednesday, which was followed by a rise to 1.5294 levels in Asia on broad based USD weakness. The Fed minutes merely repeated the message echoed by the October policy statement that – December is a live event, but still the decision to hike rates is data dependent. The implied probability of the Dec Fed rate hike stands largely unchanged around 68%, which indicated the Fed minutes did not show any major surprises. Consequently, the USD was offered across the board in Asia as traders expected the minutes to push hawkish button even further.

Focus on UK data

The UK headline reading for retail sales volume is seen contracting by 0.2% month-on-month. Last month, the retail sales blew past expectations to print at 1.9% in September as the household spending ticked higher on account of promotions centred around the Rugby World Cup. The annualised retail sales growth is seen ticking lower to 4.2% from Sep’s 6.5%. The core retail sales are seen dropping 0.5% m/m and slowing to 3.9% from Sep’s 5.9%.

All other related indicators are pointing to a slowdown in the retail sales –

• The GFK consumer sentiment survey dropped to 2.0 points from 3.0 previous

• “Major Purchase” index dropped to 7.0 points from 14.0 points

• As per CBI distributive trades survey only 19% firms see a rise in sales volume in October, which is significantly lower from Sep’s 49%
  

• BRC-KPMB retail sales monitor shows a 0.2% drop in annualized retail sales

Still, an upside surprise could be possible, but the events like Rugby world cup usually lead to a spike in retail sales initially. The effect eventually fades after first few days of the event.Consequently, the retail sales could drop even though the world cup lasted till Oct 31st.

Weak data priced-in?

The cable underperformed the EUR/USD pair amid the broad based USD selling seen in Asia. The resulting rise in the EUR/GBP may be an indication that markets could have priced-in a slowdown in the retail sales growth. Consequently, a weaker-than-expected retail sales figure would be needed to see the pair fall back below 1.5248 (50% of Apr-Jun rally). A number between 0.0%-0.2% may see a minor blip to 1.5248, which could be quickly reversed. On the other hand, a positive surprise could quickly send the pair above 1.5306 (50-DMA).

Technicals – Doors open for a rise to 200-DMA

Sterling’s sideways action after having bottomed out at 1.5025, followed by a break above 1.5248 (50% of Apr-Jun rally) is likely to see the currency rise to its 200-DMA at 1.5339. The falling channel resistance at 1.5270 was breached in Asia, however, a daily close above the same would add more credence to the bullish view. Meanwhile, a failure to sustain above 1.5248 would shift risk in favour of a fresh sell-off towards 1.51 levels.

EUR/USD Analysis – Bullish above 1.0718

The EUR/USD pair ticked higher in Asia to 1.0718, before trimming gains to trade around 1.0690 levels. The Eurozone economic calendar is light with just current account data due for release. ECB’s Coeure and Peter Praet are scheduled to speak, but are unlikely to rock the currency markets.

Technicals – Bulls await break above 50-MA on 4-hr chart

The Euro fell below the 4-hr 50-MA on Oct 19 and since then has failed at least 4 times to rise above the same. Given the bullish RSI divergence on the RSI, the pair could finally witness a break above 4-hr 50-MA at 1.0718 today, opening doors for a rise to 1.08-1.0830. An hourly close above 1.0718 could be enough to push the pair higher. On the other hand, another failure to rise above hourly 50-MA could push the pair back to 1.0616 (previous day’s low).