British Pound retreats from 1.3340 as bright UK data fails to offset risk aversion

The British Pound (GBP) remains depressed near three-week lows against the US Dollar (USD) on Friday, with upside attempts capped below 1.3340, and on track for a 1% weekly decline. The upbeat UK Preliminary S&P Global Purchasing Managers Index (PMI) and Retail Sales reports failed to lift the Pound, heavily weighed by risk-averse markets and increasing fiscal concerns in the UK.

Preliminary data for July revealed that UK business activity expanded beyond expectations in both the manufacturing and services sectors. The S&P Global Manufacturing PMI rose to 52.8. from 52.5 in June, against market expectations of a slowdown to 52.0. The Services PMI returned to expansion levels at 51.8 in July from 48.8 in June, also beating market expectations of a milder improvement to 49.4.

A few hours earlier, data released by National Statistics showed an unexpected 1% increase in retail consumption in June, beating the market consensus, which had anticipated a 0.3% decline. Year-over-year, Retail Sales increased 4.2%, almost twice the 2.3% increment forecasted by market experts.

UK data, however, has failed to offset the US Dollar's strength amid the risk-averse market mood. Reports of attacks on Saudi vessels in the Red Sea have pushed Brent Oil to levels near $100, fuelling inflationary concerns across the globe and sending US Treasury yields to multi-month highs. If that was not enough, the Trump administration announced new tariffs of 10 to 12% on 60 trading partners, including the UK, as temporary 10% global tariffs expire, further souring investors' sentiment.

Sterling strength seen on weak foundations

The Sterling, on the other hand, has been suffering from weaknesses of its own this week, with investors growing increasingly wary that Prime Minister Andrew Burnham’s spending plans might endanger the UK's fiscal stability.

In that sense, analysts at ING argue that the recent bout of Pound strength is unlikely to prove durable, stressing that “Sterling’s rally has been driven more by positioning, carry and potentially some M&A flows than by a lasting improvement in UK fundamentals.”

ING experts warn that “Sterling’s summer rally (...) looks to be built on weak foundations,” with “UK short-dated rates likely to drift lower and fiscal risks set to return ahead of the autumn.” Against that backdrop, ING expects “sterling to hand back recent gains.”