In Friday’s London trading session, the Pound Sterling (GBP) outperformed all major currencies except those in the Asia-Pacific region. The British currency gained substantial ground following the UK Office for National Statistics (ONS) report, which indicated a robust rebound in Retail Sales for July after a significant decline in June.
The ONS report revealed that Retail Sales increased by 0.5% month-over-month and 1.4% year-over-year. Department and sports equipment stores saw notable growth, bolstered by summer discounts and sporting events such as the European Football Championship. Conversely, automotive fuel demand experienced a sharp contraction.
Retail Sales are a critical gauge of consumer spending. Strong consumer demand often contributes to inflationary pressures, which may affect expectations for the Bank of England (BoE) regarding future interest rate decisions. The BoE had begun reducing its key borrowing rates in early August, though the rate cut decision was closely contested with a 5-4 vote.
The BoE’s upcoming September monetary policy meeting could be equally contentious. July’s inflation in the UK service sector dropped sharply due to slowing wage growth, while recent labor market data revealed an unexpected decline in the Unemployment Rate, suggesting economic expansion.
Market Movements: GBP Hits Two-Week High Against USD
The Pound Sterling climbed to a fresh two-week high of 1.2885 against the US Dollar (USD). This rise in the GBP/USD pair came as the US Dollar experienced a slight decline during Friday’s European trading hours, following a sharp recovery on Thursday. The US Dollar Index (DXY), which measures the Greenback against six major currencies, remained around 103.00 after rebounding from a 10-day low of 102.27.
The US Dollar’s recent recovery was fueled by strong growth in US Retail Sales for July and lower-than-expected weekly Jobless Claims. These positive data points alleviated recession fears and tempered expectations for aggressive policy easing by the Federal Reserve (Fed) in September.
The CME FedWatch tool indicates that the probability of a 50 basis points (bps) rate cut has decreased to 29.5% from 51% a week ago. Although the market’s anticipation for large rate cuts has diminished, expectations for a dovish Fed decision in September remain intact.
The number of individuals filing for jobless benefits for the first time has decreased for two consecutive weeks, suggesting better-than-expected labor market conditions despite the soft Nonfarm Payrolls (NFP) data for July. Fed policymakers have indicated a readiness for possible interest rate adjustments, with St. Louis Federal Reserve President Alberto Musalem noting that the labor market is no longer overheated.
Technical Forecast: GBP/USD Approaches Key Resistance Levels
The Pound Sterling continues to rise, reaching nearly 1.2885 against the US Dollar. The GBP/USD pair is extending an upward trend that began from a six-week low of 1.2665, supported by a positive divergence formation on the daily chart. This pattern, where the pair forms higher lows while the momentum oscillator registers lower lows, often signals a continuation of the uptrend, although confirmation from additional indicators is needed.
The 14-day Relative Strength Index (RSI) has recovered from near 40.00, suggesting renewed buying interest.
Key resistance levels for the Pound Sterling include the psychological 1.3000 mark and the annual high of 1.3044. Conversely, if the GBP/USD pair falls below the August 8 low of 1.2665, it may test the June 27 low of 1.2613 and potentially the April 29 high of 1.2570.
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