Pound Sterling bounces back as slower US Retail Sales growth weighs on US Dollar

• The Pound Sterling finds a cushion against the US Dollar after US Retail Sales miss estimates but stays below 1.2700.
• Investors will focus on the UK inflation and the BoE interest rate policy to project the next move in the Pound Sterling.
• The UK headline CPI is expected to have decelerated to the bank’s target of 2% in May.

The Pound Sterling (GBP) rebounds towards the round-level resistance of 1.2700 against the US Dollar (USD) in Tuesday’s American session. The GBP/USD pair found buyers' interest after the United States (US) monthly Retail Sales report for May showed that sales at retail stores grew by 0.1%, slower than expectations of 0.2%. The report also showed that consumers cut their spending heavily on discretionary items, suggesting that household crises have deepened due to higher interest rates by the Federal Reserve (Fed), and receipts at service stations were of lower amounts due to soft gasoline prices.

Weak US Retail Sales data has weighed on the US Dollar (USD), which rebounded in European trading hours after a modest correction from a six-week high. The US Dollar Index (DXY), which tracks the greenback’s value against six major currencies, surrenders intraday gains and falls to 105.30.

Broadly, the USD Index remained firm as Federal Reserve (Fed) officials continued to argue in favor of cutting interest rates only once this year. Fed policymakers want to see inflation decline for months to gain confidence in lowering interest rates. They remain concerned over a reacceleration in price pressures due to premature rate cuts even though the progress in the disinflation process has resumed after stalling in the first quarter of the year.

On Monday, Philadelphia Fed Bank President Patrick Harker emphasized keeping rates unchanged for now to maintain downward pressure on inflation in various sectors such as housing and services, notably auto insurance and repairs. On the interest rate outlook, Harker sees one cut in benchmark rates this year if his economic forecast plays out, Reuters reported.

Daily digest market movers: Pound Sterling will dance to the tunes of UK Inflation and BoE outcome

• The Pound Sterling exhibits a mixed performance against major currencies amid uncertainty ahead of the United Kingdom (UK) Consumer Price Index (CPI) data for May, which is scheduled for Wednesday. The inflation data will provide cues about when the Bank of England (BoE) will start reducing interest rates.
• The UK CPI report is expected to show that the headline inflation has declined to BoE’s target of 2% from April’s reading of 2.3%. In the same period, the core CPI, which strips off volatile food and energy prices, is estimated to have decelerated to 3.5% from the former release of 3.9%. However, monthly headline inflation is expected to have grown at a higher pace of 0.4% from 0.3% in April.
• Investors will pay close attention to the service inflation data, which has remained a key reason for a bumpier path of inflation toward the central bank’s 2% target. Inflation in the service sector, which is mainly driven by wage growth, could remain persistent as the Average Earnings data Excluding bonuses for three months ending April – a key measure to wage growth – grew steadily by 6.0%. The pace at which wages are growing is much higher than what is needed to bring core inflation down to 2%.
• This week, the Pound Sterling is expected to remain highly volatile as the inflation data will be followed by the BoE’s interest rate policy decision, which will be announced on Thursday. The BoE is widely anticipated to keep interest rates unchanged at 5.25% for the seventh time in a row. Therefore, investors will look for cues about the future rate-cut timeframe. Currently, investors see a 57% chance of another BoE rate hold in August, Reuters reported.

Technical Analysis: Pound Sterling remains below 20-day EMA

The Pound Sterling recovers to near the crucial resistance of 1.2700 against the US Dollar. The GBP/USD pair rebounds but still remains below the 20-day Exponential Moving Average (EMA) near 1.2720, suggesting that the near-term trend is uncertain. While the 50-day EMA near 1.2670 is acting as a major support for the Pound Sterling bulls.

Currently, the Cable holds the 61.8% Fibonacci retracement support (plotted from the March 8 high of 1.2900 to the April 22 low at 1.2300) at 1.2667.

The 14-period Relative Strength Index (RSI) falls back into the 40.00-60.00 range, indicating that the upside momentum has faded.