GBP/USD Daily Forecast – Sterling Rallies on Retail Sales Beat

Strong UK Data has Capped Downside in GBP/USD

Retail sales in the United Kingdom grew by 0.2% in July versus an analyst estimate for a decline of 0.3%. There was a downward revision for the prior month for a rise of 0.9% against the originally reported gain of 1%. The data has kept Sterling firmly bid, and the upper bound of a range is being tested in GBP/USD.

The stronger data marks a bit of a trend as CPI in the UK beat expectations earlier in the week. The consensus view has been that the central bank won’t react to stronger data as its hands are tied with Brexit uncertainty. Nevertheless, the pound has benefited from the data and is recovering some losses from an earlier sharp fall.

While the pound has been notoriously weak during the summer, the currency is the strongest for the week thus far after regaining losses today. The noticeable trend here is that it is much more volatile than the other major currencies despite the recent major shift to risk aversion.

Retail sales will be released from the US later in the day. This will tend to impact GBP/USD and there are several areas of resistance that come into play.

Technical Analysis

GBP/USD has been trading in a range since the start of the week, but today’s upward momentum seems to suggest the pair will attempt to break higher from it.

This is a contrast to EUR/USD which broke down from a range yesterday. The pair had been stuck in a range since early last week.

Considering the broader downtrend, there are several moving averages to the upside that stand to cap gains. Although an upward range break here will be important. This is mainly because the pair nearly tested the psychological 1.2000 level in the early week.

I am speculating that GBP/USD bears, that were looking to take profit at 1.2000, will likely look to close positions on a range break. In this context, I don’t think this rally is about finding value in the British pound at this level, but rather, I see a bit of a short squeeze happening if we break to new weekly highs.

On an hourly chart, the 200 moving average comes in at 1.2110. On a 4-hour chart, the 50 moving average is near there as well to create a bit of a confluence. Unless US retail sales comes in weak, this area could cap the upside.

Bottom Line

• GBP/USD is showing upside momentum following strong UK data this week
• US retail sales is up next. A stronger report might hinder the recovery with a confluence of resistance nearby.