Pound Sterling falls as weak UK PMI weighs on robust Retail Sales

• The Pound Sterling drops as dismal market mood and poor UK PMI weaken the impact of upbeat Retail Sales.
• Strong UK Retail Sales could weigh on BoE rate-cut hopes for August.
• Investors will keenly focus on the preliminary US PMIs for June 

The Pound Sterling (GBP) remains on the back foot in Friday’s London session against the majority of currencies except for the Euro, in the aftermath of strong United Kingdom (UK) Retail Sales data for May and weak preliminary S&P Global/CIPS data for June. The UK Office for National Statistics (ONS) reported stronger-than-expected Retail Sales data for May. The report showed that monthly Retail Sales rebounded, growing at a robust 2.9%, more than the 1.5% expected. On year, Retail Sales surprisingly rose by 1.3% while investors expected them to have declined by 0.9%.

Retail Sales are an indicator measuring consumer spending, which accounts for a major part of economic growth. A significant improvement in sales at retail stores despite the Bank of England’s (BoE) maintaining higher interest rates indicates strong demand but also increasing price pressures in the pipeline. This, if sustained, could be a headache for the BoE, which is focusing on achieving price stability.

On Thursday, the BoE kept interest rates steady at 5.25% in a 7-2 vote split, as expected. BoE policymakers acknowledged the return of headline inflation to the bank’s target of 2% in three years but said that won’t be enough as price pressures in the service sector are still too high. Currently, financial markets expect that the BoE will start reducing interest rates in August, which means there will be no rate cuts before the parliamentary elections. Pre-election polls show the Conservative Party of Prime Minister Rishi Sunak is behind the opposition Labour Party by around 20 points, Reuters reports.

Meanwhile, the S&P Global/CIPS PMI report showed that the Composite PMI surprisingly dropped to 51.7 but holds the 50.0 threshold. Economists forecasted the overall PMI to deliver a slight improvement to 53.1 from the prior release of 53.0. The PMIs were down due to slower growth in the Services PMI. However, the Manufacturing PMI expanded at a better pace than estimates and the former release. The agency reported, “The slowdown in part reflects uncertainty around the business environment in the lead-up to the general election, with many firms seeing a hiatus in decision-making pending clarity on various policies.”

Daily digest market movers: Pound Sterling edges down against US Dollar

• The Pound Sterling remains below 1.2700 against the US Dollar (USD) in Friday’s London session. The GBP/USD pair falls as the upbeat US Dollar (USD) has dampened market sentiment. The US Dollar rises as Federal Reserve (Fed) policymakers continue to argue in favor of one rate cut this year. Officials say they want to see inflation declining for months before lowering interest rates.
• Contrary to policymakers’ projections, investors see the Fed reducing interest rates twice this year. Also, expectations for the Fed to begin lowering its key borrowing rates from September have increased due to the recent decline in the United States (US) inflation and Retail Sales data for May. According to the CME FedWatch tool, 30-day Fed Fund Futures pricing data shows a 64% chance for rate cuts in September. 
• In Friday’s session, the US Dollar will dance to the tunes of the US S&P Global PMIs data for June, which will be published at 13:45 GMT. The Composite PMI is expected to decline, although remaining above the 50 mark that separates expansion from contraction, due to slowing growth in manufacturing and the service sector. As the PMI data gives clues about the economic health and overall demand, a weak number would indicate that the economy is off from boil, boosting Fed rate cuts bets for September.

Pound Sterling Price Today:

Technical Analysis: Pound Sterling remains below 20-day and 50-day EMAs

The Pound Sterling finds a temporary cushion near 1.2670 after the release of the upbeat UK Retail Sales data for May. However, the near-term appeal is uncertain as the GBP/USD pair is below the 20-day and 50-day Exponential Moving Averages (EMAs), which trade around 1.2700 and 1.2670, respectively.

The Cable struggles to hold the 61.8% Fibonacci retracement support at 1.2667, plotted from the March 8 high of 1.2900 to the April 22 low at 1.2300.

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