Pound Sterling recovers as decline in US Dollar offsets weak UK Retail Sales


  • The Pound Sterling rebounds to 1.2720 after recovering losses driven by weak UK Retail Sales data
  • UK Retail Sales contracted at a faster pace than expected, suggesting a soft inflation outlook.
  • The US Dollar holds gains driven by upbeat US preliminary PMI report for May.

The Pound Sterling (GBP) bounces back above 1.2700 against the US Dollar (USD) in Friday’s New York session. Earlier, the GBP/USD pair faced significant pressure after the United Kingdom (UK) Office for National Statistics (ONS) reported a sharp decline in Retail Sales data for April and the US Dollar extended recovery.

The ONS showed that monthly Retail Sales declined at a faster pace of 2.3%. Investors forecasted the economic data to have declined by 0.4% from the prior reading of -0.2%, revised negative from a stagnant performance. Annual Retail Sales contracted by 2.7% after expanding at a pace of 0.4% in March, downwardly revised from 0.8%. Economists expected a decline of 0.2%.

Retail Sales data indicate the current status of consumer spending, which accounts for a major part of economic growth. A significant decline in sales at retail stores indicates that the consequences of the Bank of England's (BoE) higher interest rates have deeply impacted consumer spending. Retail Sales data is a leading indicator of the inflation outlook, and weak numbers suggest that price pressures will ease further. This could force the BoE to shift to policy normalization earlier than previously expected.

Daily digest market movers: Pound Sterling rises as US Dollar comes under pressure

  • The Pound Sterling rebounds to 1.2700 despite weak economic data such as Retail Sales and the preliminary S&P Global/CIPS UK Purchasing Managers Index (PMI) data for May, released on Thursday. The agency reported that the Composite PMI dropped at a faster pace to a two-month low at 52.8 from the estimates of 54.0 and the prior reading of 54.1.
  • The sharp decline in the Composite PMI was driven by weak Services PMI, which fell to a six-month low at 52.9 from the consensus of 54.7 and the former reading of 55.0. The Manufacturing PMI rose above the 50.0 threshold that separates expansion from contraction and grew strongly to 51.3. Economists forecasted that the factory PMI would have increased to 49.5 from 49.1 in April.
  • Weak economic indicators have painted a gloomy picture of the UK economic outlook, which could revamp speculation that the BoE will begin reducing interest rates from the June meeting. Expectations for the BoE to begin lowering interest rates in June were strong earlier this week, but a slower-than-expected decline in the Consumer Price Index (CPI) data for April forced traders to pare rate-cut bets.
  • Meanwhile, the US Dollar edges down but still holds gains. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, clings to gains near the crucial resistance of 105.00 as uncertainty about when the Federal Reserve (Fed) will start reducing interest rates has deepened.
  • The CME FedWatch tool shows that traders see a 49% probability that interest rates will be lower than the current level at the September meeting. The probability has reduced from 64% recorded a week ago due to Fed policymakers maintaining hawkish guidance on the interest rate outlook and surprisingly strong preliminary United States PMI data for May.

Technical Analysis: Pound Sterling seems established above 1.2700

The Pound Sterling has extended its correction slightly below 1.2700 against the US Dollar from a two-month high near 1.2750 recorded on Wednesday. The near-term outlook of the GBP/USD pair remains firm as it is well-established above the 61.8% Fibonacci retracement (plotted from the March 8 high of 1.2900 to the April 22 low at 1.2300) at 1.2667.

The Cable is expected to remain in the bullish trajectory as all short-to-long-term Exponential Moving Averages (EMAs) are sloping higher, suggesting a strong uptrend.

The 14-period Relative Strength Index (RSI) has shifted into the bullish range of 60.00-80.00, suggesting that the momentum has leaned toward the upside.

Fed FAQs

Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.

The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.

In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.

Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.

 

Share: Feed news

Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers. The author will not be held responsible for information that is found at the end of links posted on this page.

If not otherwise explicitly mentioned in the body of the article, at the time of writing, the author has no position in any stock mentioned in this article and no business relationship with any company mentioned. The author has not received compensation for writing this article, other than from FXStreet.

FXStreet and the author do not provide personalized recommendations. The author makes no representations as to the accuracy, completeness, or suitability of this information. FXStreet and the author will not be liable for any errors, omissions or any losses, injuries or damages arising from this information and its display or use. Errors and omissions excepted.

The author and FXStreet are not registered investment advisors and nothing in this article is intended to be investment advice.

Recommended content


Recommended content

Editors’ Picks

EUR/USD fluctuates near 1.0750 as markets turn subdued

EUR/USD fluctuates near 1.0750 as markets turn subdued

EUR/USD continues to trade in a relatively tight channel at around 1.0750 in the American session on Wednesday. The pair struggles to finding direction with US markets remaining closed in observance of the Juneteenth Holiday.

EUR/USD News

GBP/USD stabilizes above 1.2700 after UK inflation data

GBP/USD stabilizes above 1.2700 after UK inflation data

GBP/USD clings to modest daily gains above 1.2700 on Wednesday. The data from the UK showed that annual inflation, as measured by the change in the Consumer Price Index, declined to 2% in May from 2.3% in April. The BoE will announce policy decisions on Thursday.

GBP/USD News

Gold extends sideways grind at around $2,330

Gold extends sideways grind at around $2,330

Gold (XAU/USD) struggles to capitalize on the previous day's bounce from the vicinity of the $2,300 mark and oscillates in a narrow band near $2,330. US bond markets remain closed in observance of the Juneteenth Holiday, limiting the pair's volatility.

Gold News

Polygon MATIC poised for 10% rally as momentum indicators signal strength

Polygon MATIC poised for 10% rally as momentum indicators signal strength

Polygon price formed a bullish divergence on a momentum indicator, signaling a reversal. On-chain data shows MATIC’s capitulation event occurred between June 12 and 18.

Read more

Investors' focus will be on Europe

Investors' focus will be on Europe

In the euro area, the EU commission will reveal against which countries it recommends opening an excessive deficit procedure (EDF) due to breaches of the EU fiscal rules.

Read more

Forex MAJORS

Cryptocurrencies

Signatures