Pound Sterling gains further ground as UK Retail Sales rise as expected

• The Pound Sterling exhibits sheer strength against the US Dollar on multiple tailwinds.
• Healthy growth in UK Retail Sales could diminish bets of a second straight BoE interest-rate cut.
• The US Dollar struggles to hold onto Thursday's recovery, which was driven by upbeat economic data.

The Pound Sterling (GBP) outperforms its major peers, except Asia-Pacific currencies, in Friday’s London session. The British currency gains significantly as the United Kingdom (UK) Office for National Statistics (ONS) has reported that Retail Sales rebounded in July, as expected, after contracting sharply in June.

The report showed that monthly and annual Retail Sales rose by 0.5% and 1.4%, respectively. As per the report, sales receipts at department stores and sports equipment stores grew strongly, with retailers suggesting that summer discounting and sporting events such as the European Football Championship boosted sales. On the contrary, demand for automotive fuel contracted sharply.

Retail Sales are a key measure of consumer spending. Strong demand from consumers tends to fuel inflationary pressures in the economy, so the data could dampen expectations that the Bank of England (BoE) will opt for another interest-rate cut in September. The BoE started reducing its key borrowing rates in the first week of August, but the rate-cut move was a tough call, with a 5-4 vote split.

BoE’s next monetary policy meeting in September could also be a tough call. Inflation in the UK service sector declined sharply in July due to slowing wage growth momentum. However, the latest labor market data also showed that the Unemployment Rate surprisingly fell, and that the economy is clearly on an expansion path.

Daily digest market movers: Pound Sterling refreshes two-week high against US Dollar

• The Pound Sterling posts a fresh two-week high at 1.2885 against the US Dollar (USD). The GBP/USD pair strengthens as the US Dollar falls slightly in Friday’s European trading hours after a sharp recovery on Thursday. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, hovers near 103.00 after bouncing from a 10-day low of 102.27.
• The recovery move in the US Dollar was prompted by robust growth in United States (US) monthly Retail Sales for July and lower-than-expected weekly Jobless Claims. Upbeat US data diminishes fears of a recession, dashing expectations for an aggressive policy/easing response from the Federal Reserve (Fed) in September.
• According to the CME FedWatch tool, 30-day Federal Finds Futures pricing data shows that the likelihood of 50 basis points (bps) interest-rate reduction has diminished to 29.5% from the 51% recorded a week ago. Even though market speculation for large rate cuts has significantly eased, expectations for a dovish decision in September remain firm.
• A lower number of US individuals claiming jobless benefits for the first time consecutively for two weeks suggests that labor market conditions are not as bad as shown by the Nonfarm Payrolls (NFP) data for July. The official Employment data showed soft labor demand and a significant rise in the Unemployment Rate.
• Meanwhile, Fed policymakers are also signaling they are comfortable with interest-rate cut expectations. On Thursday, St. Louis Federal Reserve President Alberto Musalem said: "The time may be nearing when an adjustment to a moderately restrictive policy may be appropriate." When asked about current labor market conditions, he said that "the labor market is no longer overheated."

Technical Forecast: Pound Sterling approaches 1.2900

The Pound Sterling jumps to near 1.2885 against the US Dollar. The GBP/USD pair extends an upside trend that started from a six-week low of 1.2665 after a positive divergence formation on a daily time frame, in which the pair continues to build higher lows while the momentum oscillator makes lower lows. This generally results in a resumption of the uptrend, but it should be confirmed with more indicators.

The 14-day Relative Strength Index (RSI) recovers after finding a cushion near 40.00, exhibiting signs of buying interest.

On the upside, the psychological figure of 1.3000 and the annual high at 1.3044 will act as major resistances for the Pound Sterling. Alternatively, the recovery move could falter if the asset breaks below the August 8 low at 1.2665. This would expose the asset to the June 27 low at 1.2613, followed by the April 29 high at 1.2570.