Pound Sterling dips further below 1.2700 on weak UK Retail Sales

• The Pound Sterling falls sharply to 1.2670 as UK Retail Sales contracted at a faster pace than expected.
• Weak UK Retail Sales data for April suggests a soft inflation outlook.
• The US Dollar strengthens after upbeat US preliminary PMI report for May.

The Pound Sterling (GBP) extends its downside to 1.2670 against the US Dollar (USD) in Friday’s London session after failing to keep above the round figure of 1.2700. The GBP/USD pair has come under pressure as the United Kingdom (UK) Office for National Statistics (ONS) has reported a sharp decline in the Retail Sales data for April and the US Dollar extended recovery.

The ONS has shown 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 by 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 drops while US Dollar extends upside

• The Pound Sterling faces an intense sell-off due to 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, firm US Dollar has also weighed on the GBP/USD pair. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, jumps to 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 53% 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 holds the 61.8% Fibo retracement support

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.