GBP to USD Forecast: Sterling Sways on UK Retail Sales Slide

Highlights

• GBP to USD gains 0.12%, closing at $1.27462 after a choppy Thursday session.
• UK retail sales for July disappointed this morning, falling 1.2%, more than economists’ 0.5% prediction.
• BoE faces pressure as weak sales may ease the need for aggressive inflation control.

Thursday’s Overview

On Thursday, the GBP to USD gained 0.12% to wrap up the day at $1.27462. A choppy start to the day saw the GBP/USD fall to an early low of $1.27024 before striking a midday high of $1.28835. However, US economic indicators dragged the GBP to USD to sub-$1.2730 before finding late support.

UK Retail Sales Give the BoE Reason to Rein in Aggressive Policy Moves

It was a busy start to the European session, with UK retail sales figures for July in focus. The July numbers rounded off a big week for the Pound, leaving the Bank of England under pressure to return inflation to target. UK wage growth, softer but sticky inflation, and UK GDP numbers give the BoE the scope to push higher.

However, retail sales fell by more than expected this morning.

Retail sales fell by 1.2% in July versus a 0.6% increase in June, with core retail sales down 1.4% (June: +0.7%). Year-over-year, retail sales were down 3.2% (June: -1.6%), with core retail sales falling by 3.4% (June: -1.6%).

Economists forecast retail sales to fall by 0.5% in July and core retail sales to decline by 0.7%. Year-over-year, economists expected retail and core retail sales to decrease by 2.1% and 2.2%, respectively.

According to the Office for National Statistics,

• Food store retail sales tumbled by 2.6% in July. While supermarkets attributed the fall to wet weather conditions, retailers also noted the impact of increased living costs and food prices on sales volumes.
• Non-food store sales declined by 1.7%, weighed by wet weather conditions.
• Automotive fuel sales increased by 0.7%, with non-store retail sales rising by 2.8%.
• Wet weather conditions and promotions fueled online shopping, which surged by 27.4% in July, up from 26.0% in June.

The larger-than-expected decline in retail sales should ease pressure on the Bank of England to aggressively tame inflation. Higher interest rates and the inflation environment have curbed spending, which should ease demand-driven consumer price inflation pressures. However, inflation and wage growth will leave further BoE rate hikes on the table.

GBP to USD sensitivity to the retail sales figures was evident. The GBP/USD rose to a post-stat high of $1.27508 before falling to a low of $1.27254.

While the UK economic calendar is busier, no Bank of England Monetary Policy Committee Members are on the calendar to speak today. The lack of scheduled speeches will leave BoE commentary with the media to draw interest.

A Day of Reflection and Fed Chatter for the Dollar

There are no US economic indicators for investors to respond to this afternoon. With no economic indicators to consider, FOMC member commentary would need consideration.

The GBP to USD has remained relatively range-bound compared with its peers, with monetary policy bets limiting any material moves. Recent economic indicators from the UK and the US have fueled expectations of more BoE and Fed monetary policy moves to return inflation to target.

Significantly, the latest round of UK economic indicators had also narrowed the economic divergence with the US, which supported the GBP to USD recovery from sub-$1.05 in September, before the latest UK retail sales figures. Today’s retail sales figures should give the dollar the upper hand.

During the US session, FOMC member commentary must align with sentiment toward Fed monetary policy to avoid a GBP to USD rebound. Dovish chatter could see investors rein back hawkish Fed bets while the markets expect the BoE to push forward.

GBP to USD Price Action

Daily Chart

The Daily Chart showed the GBP to USD sat below the $1.2785 – $1.2862 resistance band. Looking at the EMAs, the GBP to USD fell through the 50-day EMA while holding above the 200-day EMA, sending bearish near-term but bullish longer-term price signals.

Looking at the 14-Daily RSI, 46.98 reflects bearish sentiment. The RSI signals a fall to sub-$1.2650 to bring the $1.2520 – $1.2440 support band into view. However, a GBP to USD move through the 50-day EMA would give the bulls a run at the $1.2785 – $1.2862 resistance band.

4-Hourly Chart

Looking at the 4-Hourly Chart, the GBP to USD hovers below the $1.2785 – $1.2862 resistance band. However, the GBP to USD remains above the 50-day EMA while sitting below the 200-day EMA, sending bullish near-term but bearish longer-term price signals.

The 14-4H RSI reading of 51.18 reflects moderately bullish sentiment, with buying pressure outweighing selling pressure. Significantly, the RSI aligns with the 50-day EMA, signaling a move through the 200-day EMA to target the $1.2785 – $1.2862 resistance band. However, a fall through the 50-day EMA would leave sub-$1.2650 and the $1.2520 – $1.2440 support band in play.