British Pound edges higher to near 1.3650, UK Retail Sales data looms

The British Pound edged higher, reaching near 1.3650 against the US Dollar during early Asian trading hours on Friday. The US Dollar weakened as the expectation of Federal Reserve (Fed) rate increases began to fade. Investors are now watching the upcoming UK Retail Sales data for July, which will be released later on Friday. Fading US economic data and uncertainty surrounding Fed policy have added selling pressure to the Greenback.

Charu Chanana, the chief investment strategist at Saxo, noted that higher Treasury yields do not always boost the US Dollar if investors perceive the increase as reflecting fiscal risk, heavy borrowing, or persistent inflation instead of stronger US growth or tighter monetary policy. Analysts estimate a 64% chance that the Fed will keep rates unchanged in September, with a 36% chance of a rate hike.

The Bank of England (BoE) is expected to maintain interest rates at 3.75% for the rest of the year, according to a majority of polled economists. Traders are anticipating the UK Retail Sales data to provide further insight into the UK interest rate outlook. If the data comes weaker than expected, the Pound could weaken in the near term.

Danske Bank analysts stated that the latest inflation data, combined with weak labor market information, has helped temper expectations for further rate hikes. The Federal Reserve's Musalem delivered a speech consistent with the established baseline, with a speechtracker score of 7/10 indicating a familiar mix of concern and caution.

The tone was modestly hawkish due to strong growth and accommodative financial conditions, but with inflation still stuck around 2.5%-3%. The FXS Fed Sentiment Index fell by 0.34 points to 132.42, showing a slight decrease in hawkishness relative to the previous reading, yet remaining above the neutral 100 line. This indicates the Fed is still seen as hawkish, even with minor softening.

The GBP/USD pair is currently bullish in the near term, trading above the 100-day simple moving average and the Bollinger 20-period middle band. Price is approaching the upper Bollinger band at 1.3665, suggesting a strong topside extension. On the downside, support can be found at the Bollinger middle band cluster around 1.3485, followed by the 100-day SMA at 1.3432. A break below this support zone could be viewed as a dip-buying opportunity.