GBP/USD recovers back above 1.2400s, focus turns to Friday’s key UK Retail Sales report

• GBP/USD has recovered much of Wednesday’s slump and is back above 1.2400 as the buck fades.
• The 21DMA once again offered strong resistance around the 1.2500 mark, which could be a key resistance area.
• UK data and its implications for the economic outlook/BoE policy remains in focus with Retail Sales data out on Friday.

After dipping more than 1.0% on Wednesday amid broad risk-off macro flows and technical selling after a rejection of the 21-Day Moving Average, GBP/USD has posted a healthy recovery on Thursday. The pair is back to trading above the 1.2400 level and currently sits around 1.2425 with on-the-day gains of about 0.7%, with cable benefitting primarily as a result of USD weakness as US yields pull lower.

Where US yields across most of the curve are trading lower on the week, UK yields continue to trade substantially higher in wake of Tuesday’s super strong UK labour market report and after data on Wednesday revealed UK Consumer Price Inflation hitting four-decade highs at 9.0% YoY. This data combo appears to have revived some bets on BoE tightening which had for the most part been easing on UK growth fears in recent weeks.

The BoE tightening discussion will remain a key driver of sterling for the rest of the week with April Retail Sales data scheduled for release on Friday. Traders will recall the ugly March report was one of the fundamental catalysts for the rapid mid-April drop in GBP/USD, given it highlighted consumer suffering as the UK passes through its worst cost of living squeeze in decades.

Thus, traders will continue to mull the BoE’s policy dilemma over how much more tightening is needed. Another ugly Retail Sales report, coupled with continued weakness in risk appetite in the coming days (Wednesday was Wall Street’s worst day since June 2020), could see GBP/USD quickly give up its weekly gains which currently stand at just over 1.0%.

Traders should bear in mind that buying USD dips has been a profitable strategy in recent months given the Fed’s hawkish shift and broad risk asset weakness. The message from Fed policymakers this week was that the bank remains resolutely focused on inflation-fighting, meaning rapid policy tightening remains on autopilot for now, with a strong chance rates are lifted above the so-called neutral level. This stance is much more hawkish relative to the BoE, suggesting that in the near-term, 1.2500 might remain a ceiling, as has been the case thus far this week.