In Friday’s London session, the Pound Sterling (GBP) demonstrated resilience, bouncing back to 1.2700 against the US Dollar (USD) after encountering significant pressure earlier. The decline in the GBP/USD pair followed the release of Retail Sales data for April by the United Kingdom (UK) Office for National Statistics (ONS), coupled with a recovery in the US Dollar.
According to the ONS report, monthly Retail Sales experienced a sharper decline of 2.3%, compared to forecasts of a 0.4% decrease from the previous reading of -0.2%, which was revised downward from a flat performance. Additionally, annual Retail Sales contracted by 2.7% after expanding by 0.4% in March, marking a downward revision from 0.8%. Economists had anticipated a decline of 0.2%.
Retail Sales data serves as a crucial indicator of consumer spending, a significant driver of economic growth. The pronounced drop in retail sales suggests that the effects of the Bank of England‘s (BoE) higher interest rates have significantly impacted consumer spending. Furthermore, weak Retail Sales data indicates a subdued inflation outlook, potentially prompting the BoE to consider policy normalization earlier than previously anticipated.
Despite weak economic indicators, including Retail Sales and the preliminary S&P Global/CIPS UK Purchasing Managers Index (PMI) data for May, which indicated a decline to a two-month low, the Pound Sterling rebounded to 1.2700. Notably, the Composite PMI dropped to 52.8, driven by a sharp decline in Services PMI to a six-month low at 52.9. However, Manufacturing PMI exceeded expectations by rising to 51.3.
Weak economic signals have cast a shadow on the UK’s economic prospects, reigniting speculation that the BoE may commence interest rate cuts as early as the June meeting. Earlier expectations for rate cuts in June were robust, but a slower-than-expected decline in the Consumer Price Index (CPI) data for April prompted traders to scale back rate-cut expectations.
Meanwhile, the US Dollar, while edging down, maintained gains, with the US Dollar Index (DXY) hovering near the crucial resistance level of 105.00. Uncertainty surrounding the timing of the Federal Reserve’s (Fed) interest rate reductions has increased, with traders attributing a 53% probability to lower interest rates at the September meeting, down from 64% recorded a week ago.
Pound Sterling Shows Strength Above 61.8% Fibonacci Retracement Support
The GBP/USD pair has displayed resilience, trading slightly below 1.2700 against the US Dollar after reaching a two-month high near 1.2750. The near-term outlook remains positive as the pair maintains its position above the 61.8% Fibonacci retracement level at 1.2667, drawn from the March 8 high of 1.2900 to the April 22 low of 1.2300.
The bullish trajectory is further supported by upward sloping short-to-long-term Exponential Moving Averages (EMAs), indicating a robust uptrend. Additionally, the 14-period Relative Strength Index (RSI) has entered the bullish range of 60.00-80.00, signaling momentum favoring the upside.
