GBP/USD dips on sour sentiment, soft UK retail sales

• UK Retail Sales for July disappoint with a -1.2% MoM drop, surpassing the anticipated -0.5% decline.
• Strong UK GDP readings and high wages keep BoE rate hike expectations alive, with a 6% peak on the Bank Rate anticipated.
• Eyes on upcoming PMIs, housing data, and Fed Chair Jerome Powell’s speech for insights into the future trajectory of monetary policy.

GBP/USD retreats from daily highs and losses for the second day in the week but remains set to finish the week on a higher note. Retail Sales in the United Kingdom (UK) were softer, but most data supports the Bank of England’s (BoE) case for a rate hike at its upcoming meeting. The GBP/USD is trading at 1.2740 after hitting a daily high of 1.2766.

Despite a dip in Retail Sales, robust UK GDP and wage growth fuel expectations of a BoE rate hike, setting the stage for GBP/USD appreciation

Global equities post losses reflect a sour sentiment weighing on the GBP/USD’s pair as flows seeking safety bolstered the US Dollar (USD). The Office for National Statistics (ONS) revealed that Retail Sales for July plunged -1.2% MoM, below estimates for a -0.5% drop, while annually biased plummeted -3.2%, exceeding -2.1% estimates.

Nevertheless, strong readings on UK GDP and steadily high wages maintain expectations for further tightening by the BoE high, as money market players are pricing in a 6% peak on the Bank Rate. Hence, the GBP/USD would appreciate in the near term, as the interest rate differential compared to the Federal Funds Rates (FFR) in the US, currently at 5.25%-5.50%, favors the Sterling (GBP).

On the US front, the latest round of economic data keeps the greenback underpinned, and US Treasury bond yields high. Monetary policy is expected to remain at restrictive levels, as noted by Federal Reserve (Fed) officials, as July’s monetary policy minutes revealed.

The US Dollar Index (DXY), a gauge of the greenback’s value against a basket of six currencies, hovers around two-month highs at 103.680, while US Treasury bond yields pare some of its losses, with the US 10-year Treasury note yielding 4.239%, down four bps.

What to watch?

The UK economic docket will feature PMIs for August on its preliminary reading. On the US front, PMIs, housing data, Fed speakers, and Fed Chair Jerome Powell’s speech at the Jackson Hole Symposium are eyed for clues of the forward path of monetary policy.

GBP/USD Price Analysis: Technical outlook

The GBP/USD daily chart portrays the pair as neutral biased, though it appears bottomed at around 1.2620. Since then, the GBP/USD reclaimed 1.2700 and stood four days above the latter. Although the pair edged toward the 1.2800 figure, it was capped by the 50-day Moving Average (DMA) at 1.2786. Nevertheless, once breached, the next stop would be 1.2800, followed by August 10 at 1.2819 and the next intermediate resistance at 1.2850. Contrarily, if GBP/USD tumbles below 1.2700, that would exacerbate a fall to 1.2660.