Pound Sterling recovers losses as weak US Retail Sales improve market sentiment

• Pound Sterling recovers as weak US Retail Sales improve market mood.
• The UK economy is in a technical recession after contracting in the last quarter of 2023.
• The BoE may consider aggressive rate cuts due to easing inflation, slowing wage growth, and poor economic outlook.

The Pound Sterling (GBP) rebounds from the day's low as downbeat United States Retail Sales data for January has improved market sentiment. The US Census Bureau has reported that Retail Sales contracted significantly by 0.8% against the consensus of a moderate decline of 0.1%. In December, the economic data was expanded by 0.6%. The US Dollar Index (DXY) falls vertically to 104.30

In the European session, the Pound Sterling faced pressure as the United Kingdom Office for National Statistics (ONS) showed that the economy was in a technical recession in the second half of 2023. The preliminary Q4 Gross Domestic Product (GDP) data contracted by 0.3% after registering a de-growth of 0.1% in the July-September quarter. This means the UK economy has contracted for the second straight quarter in a row – the definition of a technical recession. The data could also ignite expectations of early rate cuts by the Bank of England (BoE), which may be keen to introduce growth-stimulating policies.

The broader appeal for the Pound Sterling is downbeat as most economic indicators, apart from the economic contraction, point to aggressive rate cuts by the BoE to avoid further contraction. The Pound Sterling tends to face foreign outflows when expectations for the BoE turning dovish escalate.

The consumer price inflation remained steady in January while investors forecasted it to accelerate further. Also, BoE Governor Andrew Bailey sees price pressures taming to the required target by Spring.

While wage growth and service inflation are still skewed to the upside, they are unfavorable for achieving the 2% inflation target. However, a moderate decline in wage growth momentum is visible.

Daily Digest Market Movers: Pound Sterling rebounds while US Dollar plummets

• Pound Sterling recovers against the US Dollar after the release of the downbeat US Retail Sales data.
• The US Retail Sales were down by 0.8% amid lower receipts at gasoline stations and weak automobile sales.
• However, weak Retail Sales data has failed to lift up expectations of Federal reserve (Fed) rate-cut in May policy meeting.
• On the United Kingdom front, the ONS has reported that the economy contracted by 0.3% in the last quarter of 2023. Investors anticipated a deceleration in growth by 0.1%.
• The UK GDP also contracted in the third quarter of 2023, indicating the economy meets the criteria for a technical recession.
• This has escalated hopes of early rate cuts by the Bank of England as the economy desperately needs the stimulus provided by lower borrowing costs.
• This week, the expectations for an early unwinding of the restrictive policy stance by the Bank of England were already prompted by a steep slowdown in wage growth and steady annual inflation figures.
• Meanwhile, the inflation outlook softened on Wednesday after BoE Governor Andrew Bailey said inflation will come down to the target by spring.
• Andrew Bailey warned that wage growth and service inflation are still too high to be consistent with the central bank’s target of 2%.
• Bailey mentioned that policymakers would support rate cuts only after getting evidence that wage growth is receding.
• The monthly Manufacturing Production for December rose steadily by 0.8% MoM, while investors anticipated a stagnant performance. On an annual basis, the economic data grew at a higher pace of 2.3% against expectations of 0.6% and the prior reading of 1.9%.
• Monthly Industrial Production was up by 0.6% against 0.5% growth in November.  Investors anticipated a decline of 0.1%. Surprisingly, the annual factory data rose by 0.6% while investors forecasted a contraction of 0.1%.

Technical Analysis: Pound Sterling finds interim support near 1.2540

Pound Sterling rebounds to day's high near 1.2570 against the US Dollar, however, the broader appeal is still bearish. The GBP/USD pair is expected to resume its downside journey toward the 200-day Exponential Moving Average (EMA), which trades around 1.2520. More downside seems likely as the 20 and 50-day EMAs are on the verge of delivering a bearish crossover.

The 14-period Relative Strength Index (RSI) struggles to hold above 40.00. Failing to hold the same would trigger a bearish momentum.