Pound Sterling gains agains USD despite upbeat US Retail Sales data

The Pound Sterling (GBP) rises around the psychological resistance of 1.2700 against the US Dollar (USD) in Tuesday’s North American session. The GBP/USD pair moves higher as the USD surrenders gains even though the United States (US) monthly Retail Sales data for November has come in better than expected. The US Dollar Index (DXY), which tracks the Greenback's value against six major currencies, hovers near an almost three-week high around 107.00.

The Retail Sales data, a key measure of consumer spending, rose by 0.7%, faster than estimates and the former release of 0.5%.

This week, the major trigger for the US Dollar is the Federal Reserve’s (Fed) policy decision, which will be announced on Wednesday.

According to the CME FedWatch tool, traders are almost certain that the Fed will reduce interest rates by 25 basis points (bps) to 4.25%-4.50%. As the Fed is widely anticipated to cut its key borrowing rates, investors will pay close attention to Chair Jerome Powell’s comments at a press conference and the dot plot for fresh interest rate guidance.

Market participants expect the Fed to shift its policy stance from “dovish” to “slightly hawkish” on the assumption that upside risks to inflation have accelerated while downside risks to employment have diminished, according to the latest Bloomberg survey.

The Flash US S&P Global PMI report for December also showed that employment edged higher in December, up for the first time in five months. This reflected a second successive monthly rise in manufacturing jobs and the first increase in service sector employment since July.

Daily digest market movers: Pound Sterling outperforms on robust UK wage growth

• The Pound Sterling rises sharply against its major peers on Tuesday after the release of the United Kingdom (UK) labor market data for three months ending October. The British currency strengthens as Average Earnings Excluding bonuses, a key measure of wage growth, rose at a robust pace of 5.2%, faster than estimates of 5% and accelerating from the former 4.9% advance.
• Bank of England (BoE) officials closely track wage growth data when deciding on interest rates as it is a major driving force to inflationary pressures in the UK service sector. Meanwhile, Average Earnings Including bonuses also rose by 5.2%, faster than expectations of 4.6% and the former reading of 4.4%.
• Robust wage growth data has strengthened the British currency, offsetting other components of the labor data release that weren't that GBP-positive. For example, in the three months ending October, the economy added 173K new workers, lower than the former release of 253K, upwardly revised from 219K. The ILO Unemployment Rate came in line with estimates and the prior release of 4.3%.
• Higher wage growth suggests that UK service inflation could remain high, with fresh inflation data to be released on Wednesday. The core Consumer Price Index (CPI) – which excludes volatile items – is estimated to have grown by 3.6%, faster than the 3.3% advance in October.
• Such an outcome would cement market expectations that the BoE will leave interest rates unchanged at 4.75% in the monetary policy announcement on Thursday.

Technical Analysis: Pound Sterling holds gains near 20-day EMA

The Pound Sterling moves higher to near the 20-day Exponential Moving Average (EMA) near 1.2815 against the US Dollar (USD). The GBP/USD pair rebounded after gaining ground near the upward-sloping trendline around 1.2600, which is plotted from the October 2023 low of around 1.2035.

The 14-day Relative Strength Index (RSI) oscillates in the 40.00-60.00 range, suggesting a sideways trend.

Looking down, the pair is expected to find a cushion near the psychological support of 1.2500. On the upside, the 200-day EMA near 1.2710 will act as key resistance.