Pound Sterling weakens as UK Retail Sales contract at faster-than-expected pace
- The Pound Sterling faces a sharp sell-off as UK Retail Sales declined at a faster-than-projected pace in October.
- Weak UK Retail Sales data could boost BoE dovish bets for December.
- Investors await the flash S&P Global PMI data for both the UK and the US.
The Pound Sterling (GBP) weakens against a majority of its peers, except Asia-Pacific currencies, as the United Kingdom (UK) Retail Sales data for October contracted at a faster-than-expected pace. The British currency trades near 1.2550 against the US Dollar (USD) in Friday’s London session, a six-month low.
Retail Sales, a key measure of consumer spending, declined by 0.7% compared with the previous month. In September, sales increased by a marginal 0.1%, downwardly revised from the 0.3% previously reported. Year-on-year, Retail Sales grew by 2.4%, less than the estimates of 3.4% and the former release of 3.2% (downwardly revised from 3.9%).
Weak Retail Sales data is expected to boost expectations of interest-rate cuts by the Bank of England (BoE) in the December meeting as they highlight weakness in consumer spending, a key growth factor for the UK economy.
Still, for now, traders expect the BoE to leave interest rates unchanged at 4.75% not only in the December meeting but also in the one to be held in February. This is because UK inflation data came in hotter than expected in October, with services inflation – a closely watched inflation indicator by BoE officials for decision-making on interest rates – rising to 5%.
Investors should brace for more volatility in the British currency as the flash S&P Global/CIPS Purchasing Managers’ Index (PMI) data is scheduled to be published at 09:30 GMT. The Composite PMI is expected to come in at 51.8, unchanged from the previous month, suggesting that the country's private-sector activity continued to expand. Investors will also focus on the impact of the Labour Party’s first budget on business sentiment.
Daily digest market movers: Pound Sterling refreshes six-month low against US Dollar
- The Pound Sterling posts a fresh six-month low near 1.2550 against the US Dollar (USD) in Friday’s London session. The GBP/USD pair extends its downfall after weak UK Retail Sales data. However, the Cable was already under pressure as the US Dollar (USD) strengthened due to lower-than-expected United States (US) Initial Jobless Claims for the week ending November 15.
- Individuals claiming jobless benefits for the first time surprisingly came in at 213K, lower than estimates of 220K. Lower jobless claims help to ease concerns about the labor market. However, the report also showed that individuals were taking longer-than-usual to find new jobs.
- The outlook of the US Dollar has remained firm on expectations that there will be fewer interest rate cuts from the Federal Reserve (Fed) in the current policy-easing cycle. Market expectations for the Fed to adopt a more gradual policy-easing approach have strengthened as investors believe that the economic agenda of President-elect Donald Trump will boost inflationary pressures and economic growth, a scenario that will force the Fed to remain cautious on interest rates.
- On Thursday, Richmond Fed Bank President Thomas Barkin said in an interview with the Financial Times (FT) that the economy is more vulnerable to inflationary shocks as producers are passing on costs to customers more than in the past, Reuters reported. "We're somewhat more vulnerable to cost shocks on the inflation side than we might have been five years ago,” Barkin said.
- In Friday’s US session, investors will focus on the preliminary S&P Global PMI data for November, which will be published at 14:45 GMT. Investors will pay close attention to the PMI data to get fresh cues about the current status of economic health, and the impact of recent Fed rate cuts and Donald Trump’s victory on business sentiment.
Technical Analysis: Pound Sterling sees more downside near 1.2550
The Pound Sterling slides to near 1.2550 against the US Dollar on Friday, extending losses for a third consecutive trading day. The GBP/USD pair's outlook has turned bearish given that all short-to-long term Exponential Moving Averages (EMA) are sloping down.
The 14-day Relative Strength Index (RSI) remains in the 20.00-40.00 range, suggesting that a strong bearish momentum is intact.
Looking down, the pair is expected to find a cushion near May’s low of 1.2446. On the upside, the November 20 high around 1.2720 will act as key resistance.
Pound Sterling FAQs
The Pound Sterling (GBP) is the oldest currency in the world (886 AD) and the official currency of the United Kingdom. It is the fourth most traded unit for foreign exchange (FX) in the world, accounting for 12% of all transactions, averaging $630 billion a day, according to 2022 data. Its key trading pairs are GBP/USD, also known as ‘Cable’, which accounts for 11% of FX, GBP/JPY, or the ‘Dragon’ as it is known by traders (3%), and EUR/GBP (2%). The Pound Sterling is issued by the Bank of England (BoE).
The single most important factor influencing the value of the Pound Sterling is monetary policy decided by the Bank of England. The BoE bases its decisions on whether it has achieved its primary goal of “price stability” – a steady inflation rate of around 2%. Its primary tool for achieving this is the adjustment of interest rates. When inflation is too high, the BoE will try to rein it in by raising interest rates, making it more expensive for people and businesses to access credit. This is generally positive for GBP, as higher interest rates make the UK a more attractive place for global investors to park their money. When inflation falls too low it is a sign economic growth is slowing. In this scenario, the BoE will consider lowering interest rates to cheapen credit so businesses will borrow more to invest in growth-generating projects.
Data releases gauge the health of the economy and can impact the value of the Pound Sterling. Indicators such as GDP, Manufacturing and Services PMIs, and employment can all influence the direction of the GBP. A strong economy is good for Sterling. Not only does it attract more foreign investment but it may encourage the BoE to put up interest rates, which will directly strengthen GBP. Otherwise, if economic data is weak, the Pound Sterling is likely to fall.
Another significant data release for the Pound Sterling is the Trade Balance. This indicator measures the difference between what a country earns from its exports and what it spends on imports over a given period. If a country produces highly sought-after exports, its currency will benefit purely from the extra demand created from foreign buyers seeking to purchase these goods. Therefore, a positive net Trade Balance strengthens a currency and vice versa for a negative balance.
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