GBP/USD Unable to Recover Despite Upbeat BoE Outlook and UK Retail Sales Beat

The Bank of England kept rates unchanged yesterday which was expected. However, the increase in its asset purchase program was less then what most analysts were looking for.

Shortly after its last meeting, several MPC members voiced their concerns over the economy and said that different avenues were being explored to ease policy further.

However, the recent easing of lockdown restrictions in the UK and improvement in incoming data had the central bank change its tune. The BoE showed optimism towards an economic recovery and made a notable revision to its GDP forecast from -27% to -20%.

Despite the somewhat surprising take from the BoE, and a stronger than expected retail sales report released earlier today from the UK, Sterling has struggled to catch a bid.

Retail sales were reported to increase by 12% in May, nearly double the analyst forecast of 6.3%. Sales were boosted by contributions from Non-food stores and online sales.

Sterling is set to post the worst performance among the major currencies this week and is down about 2% from its high earlier in the week. The pair has erased a bulk of its gains for the month thus far.

Technical Analysis

GBP/USD is seen hovering near two and a half week lows ahead of the North American open with volatility starting to slow.

The pair broke below major support near 1.2500 yesterday which has set a bearish tone. Near-term recovery rallies may be met with sellers at 1.2483 followed by 1.2500.

The dollar index (DXY) is seen near highs for the week and is on pace to post a second consecutive week of gains. Although gains have marginal and upward momentum is largely lacking.

A potential downside target for GBP/USD is seen at 1.2355. The near-term momentum is clearly to the downside at this point. It may take a sustained break above 1.2500 to change the near-term outlook.

Bottom Line

• Sterling shows underlying weakness as the pair has fallen despite an optimistic outlook from the BoE and a notable rebound in retail sales.
• Volatility may slow in the session ahead considering the light economic calendar.

For a look at all of today’s economic events, check out our economic calendar.