GBP/USD remains depressed post-UK Retail Sales, holds above 1.2400 ahead of PMIs

• GBP/USD edges lower on Friday and is pressured by a combination of factors.
• Bets for more Fed rate hikes and a softer risk tone benefits the safe-haven buck.
• The dismal UK Retail Sales weigh on the GBP and contribute to the downtick.

The GBP/USD pair comes under some selling pressure on the last day of the week and maintains its offered tone through the early European session. The pair currently trades around the 1.2425-1.2420 region, down over 0.15% for the day, and reacts little to the latest UK macro data.

The UK Office for National Statistics reported this Friday that domestic Retail Sales contracted more-than-expected, by 0.9% in March and reversed a major part of the rise recorded in the previous month. Furthermore, sales excluding fuel also missed consensus estimates and dropped by 1% during the reported month as compared to the 1.4% rise reported in February. This, in turn, undermines the British Pound, which, along with a modest US Dollar (USD) uptick, acts as a headwind for the GBP/USD pair.

The prospects for further policy tightening by the Federal Reserve (Fed), along with a softer risk tone, lend some support to the safe-haven Greenback. In fact, the markets seem convinced that the Federal Reserve will raise rates by 25 bps in May and have been pricing in a small chance of another rate hike in June, bolstered by the recent hawkish remarks by FOMC officials. This raises worries about economic headwinds stemming from rising borrowing costs, which tempers investors' appetite for riskier assets.

The downside for the GBP/USD pair, however, seems cushioned, at least for the time being, amid rising bets for an additional interest rate hike by the Bank of England (BoE). Against the backdrop of stronger UK wage growth data released earlier this week, the stubbornly high inflation should keep pressure on the BoE to raise interest rates further. This makes it prudent to wait for strong follow-through selling before confirming that this week's bounce from the 1.2350 strong horizontal support has run out of steam.

Nevertheless, the GBP/USD pair remains on track to register modest weekly gains as market participants now look forward to the release of the flash PMI prints from the UK and the US for a fresh impetus. This, along with the US bond yields and the broader risk sentiment, will influence the USD price dynamics and produce short-term trading opportunities around the GBP/USD pair heading into the weekend.

Technical levels to watch