British Pound advances as weak US sales deepen USD slide

The British Pound Sterling experienced an uptick of approximately 0.40% on Friday, as US economic data bolstered expectations of a dovish Federal Reserve stance. This sentiment was further reinforced by an erosion in consumer confidence and a slight improvement in disinflation trends. GBP/USD climbed to the level of 1.3545, after rebounding from a low of 1.3482.

Throughout the week, GBP/USD is expected to conclude with a gain. Meanwhile, the US Dollar Index (DXY), which gauges the dollar's performance against six other currencies, declined by 0.40% to 99.54, potentially ending near weekly lows as traders discounted potential Federal Reserve interest rate hikes. On the US side, July retail sales fell short of expectations, dropping 0.6% compared to the forecast of a 0.1% increase.

Notably, both wholesale sales and those not linked to automobiles experienced declines. Retail sales in the control group used for Gross Domestic Product (GDP) calculations also dropped by -0.4%, after a 0.4% rise in June. The University of Michigan Consumer Sentiment, which measures the outlook of American households, deteriorated in its preliminary August reading, with households expressing growing concerns about high prices.

This index decreased from 55.2 in July to 51.0. Inflation expectations for the subsequent 12 months rose slightly from 4.2% to 4.3%, while those for the next five years remained stable at 3.3%. Market participants anticipate the Federal Reserve to maintain interest rates, with a 70% probability of keeping rates unchanged and a 30% chance of a rate increase, according to Prime Terminal data.

In the United Kingdom, the weekly economic agenda was relatively subdued, except for the release of Gross Domestic Product (GDP) figures, which indicated a 0.3% expansion in June, the strongest performance among the G7 advanced economies. Upcoming next week, the UK calendar will include updates on inflation, employment, and retail sales.

In the US, housing data, ADP employment figures, jobless claims, and Flash PMIs will be reported. On the daily chart, GBP/USD is trading at 1.3549, extending its recovery above a cluster of key simple moving averages near 1.3374 and former trend-line support levels at 1.3423 and 1.3508, which now provide a bullish near-term outlook.

The Relative Strength Index (14) stands at 63.9, leaning towards an overbought condition, indicating that upward momentum remains positive but increasingly stretched. Immediate support for GBP/USD is identified near the recent breakout level around 1.3508, followed by the previous downward resistance trend-line at 1.3423 and the triple simple moving average area around 1.3374, with a further structural support level at 1.3342 strengthening the overall market foundation.

The technical analysis was assisted by an AI tool. The Pound Sterling (GBP) is the oldest currency in continuous production (since 886 AD) and the official currency of the United Kingdom. It holds the position of the fourth most traded currency in the foreign exchange (FX) market, accounting for 12% of all transactions, averaging $630 billion daily, as of 2022 data.

Key trading pairs for GBP include GBP/USD, commonly referred to as 'Cable,' which constitutes 11% of FX transactions; GBP/JPY, known as the 'Dragon' by traders (3%); and EUR/GBP (2%). The Pound Sterling is issued by the Bank of England (BoE). The most critical factor influencing GBP's value is monetary policy decisions made by the BoE, which aim for a steady inflation rate around 2%.

The BoE employs interest rates as its primary tool to achieve this objective. When inflation is too high, the BoE raises interest rates to curb inflation, making the UK a more appealing destination for global investments. Conversely, when inflation falls excessively low, it signals a slowing economy, prompting the BoE to consider rate cuts to stimulate borrowing and investment.

Economic data releases provide insights into the economy's health and can impact GBP's value. Indicators like GDP, Manufacturing and Services PMIs, and employment figures can sway the direction of the Pound Sterling. A robust economy is favorable for Sterling, as it attracts foreign investment and might prompt the BoE to raise interest rates, thereby strengthening GBP.

Conversely, weak economic data may lead to a decline in GBP. Another crucial data release for GBP is the Trade Balance, which measures the difference between a country's export earnings and import spending over a specific period. A positive net Trade Balance strengthens a currency, while a negative balance weakens it. Markets analyst, news editor, and trading instructor with over 14 years of experience across various financial markets.