Pound Sterling slumps after upbeat US Retail Sales report, focus is on UK Inflation

The Pound Sterling (GBP) falls sharply below the psychological figure of 1.3000 against the US Dollar (USD) in Tuesday’s New York session. The GBP/USD pair slumps as the United States (US) Retail Sales report for June shows better-than-expected sales receipts at retail stores. Monthly Retail Sales remained flat, as expected, from an upwardly revised reading of 0.3% in May.

Retail Sales, excluding automobiles, rose at a faster pace of 0.4% than the estimates and the prior release of 0.1%. Retail Sales Control Group, a close measure of the consumer spending component of Gross Domestic Product (GDP), grew strongly by 0.9% from the former reading of 0.4%. The economic data has provided support to the US Dollar though it is incapable of impacting the inflation outlook. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, recovers strongly from the key support at around 104.00.

On Monday,  Federal Reserve (Fed) Chair Jerome Powell acknowledged that recent inflation data has added confidence that inflation is on course to return to the desired rate of 2% in his speech at the Economic Club of Washington. However, he mentioned that policymakers need to gain more confidence before considering interest rate cuts. 

Separately, San Francisco Federal Reserve Bank President Mary Daly said, “confidence is growing” that inflation is heading towards the 2% target. Daly refrained from providing a timeframe for rate cuts. She further said that the central bank should hold rates so that they manage to maintain downside pressure on inflation but not too long that they become a challenge to job growth.

Daily digest market movers: Pound Sterling underperforms against US Dollar

• The Pound Sterling remains broadly bullish against its major peers on Tuesday, except the US Dollar, with the focus on the United Kingdom (UK) Consumer Price Index (CPI) for June and the employment data for the three months ending May, which will be published on Wednesday and Thursday, respectively.
• Investors will pay close attention to the inflation readings as they will suggest whether the Bank of England (BoE) will start reducing interest rates from the August meeting, as expected by financial markets. Economists expect the annual headline and core CPI, which excludes volatile food and energy prices, to have grown steadily by 2% and 3.5%, respectively. The monthly headline inflation is estimated to have risen at a slower pace of 0.1% from the former reading of 0.3%.
• Apart from the standard inflation components, investors will keenly focus on the status of price pressures in the service sector, a major factor that has been restricting BoE policymakers from advocating early rate cuts.
• On Monday, BoE’s external member of the Monetary Policy Committee, Swati Dhingra, cited concerns over squeezing consumer spending due to the maintenance of a restrictive interest rate framework. She favored cutting borrowing rates, believing that inflation is unlikely to rise sharply again.
• Meanwhile, the three-month-ending in May ILO Unemployment Rate is estimated to remain steady at 4.4%. In the same period, other key components on which market participants will keenly focus are Average Earnings, Excluding and Including bonuses, a key measure of wage growth that fuels service inflation. The wage growth measure, Excluding and Including bonuses, is estimated to decelerate to 5.7%.

Pound Sterling Price Today:

Technical Analysis: Pound Sterling slides below 1.3000

The Pound Sterling slides below the psychological figure of 1.3000. The GBP/USD pair drops as the US Dollar bounces back. However, the broader outlook  of Cable's near-term appeal remains firm after a breakout above the March 8 high near 1.2900, which has become a support zone. The pair is expected to extend its upside towards the two-year high near 1.3140. 

All short-to-long-term Exponential Moving Averages (EMAs) are sloping higher, suggesting a strong bullish trend.

The 14-day Relative Strength Index (RSI) jumps to nearly 70.00 for the first time in more than a year, indicating a strong momentum towards the upside.