Pound Sterling Faces Pressure from Weak PMI and Strong Retail Sales

Economic

Forex

Summary:

The Pound Sterling (GBP) weakens towards 1.2600 as poor UK PMI data dampens the economic outlook despite strong retail sales. The BoE's stance remains cautious due to ongoing inflation pressures. Meanwhile, US PMI data outperforms expectations, boosting the US Dollar (USD).

SELL GBPUSD

Close Time

CLOSED

1.26400

Entry Price

1.24800

1.27000

1.35148 +0.00141 +0.10%

60.0

Pips

Loss

1.24800

1.27000

Exit Price

1.26400

Entry Price

1.27000

In a volatile session on Friday, the Pound Sterling (GBP) retreated against the US Dollar (USD) and other major currencies, driven by mixed economic signals from the United Kingdom (UK) and the United States (US). The GBP/USD pair fell below the psychological threshold of 1.2600, trading at around 1.2630 during the American session. This decline comes despite strong UK retail sales data for May, as weaker-than-expected UK PMI data weighed on market sentiment.

UK Economic Data: Mixed Signals

The UK Office for National Statistics (ONS) reported that retail sales in May rebounded significantly, growing by 2.9% month-over-month, surpassing the forecast of a 1.5% increase. On an annual basis, retail sales rose by 1.3%, defying expectations of a 0.9% decline. This data indicates robust consumer spending, a critical driver of economic growth. However, the positive retail sales figures were overshadowed by disappointing preliminary S&P Global/CIPS PMI data for June.

The Composite PMI fell to 51.7, just holding above the 50.0 threshold that separates expansion from contraction, but below the forecasted 53.1. The decline was attributed to slower growth in the services sector, while the manufacturing sector showed modest improvement. The report highlighted uncertainty around the business environment ahead of the general election, causing a pause in decision-making by many firms.

Bank of England's Cautious Stance

On Thursday, the Bank of England (BoE) kept interest rates steady at 5.25% in a 7-2 vote split. Policymakers noted that while headline inflation is expected to return to the bank's 2% target within three years, persistent price pressures in the services sector remain a concern. The financial markets are now speculating on the timing of potential rate cuts, with expectations split between the BoE's August or September meetings. The ongoing wage growth, which fuels service inflation, further complicates the BoE's policy normalization efforts.

US Economic Data: Strong PMI Boosts USD

In contrast, the US economic data painted a more optimistic picture. The preliminary S&P Global PMI for June exceeded expectations, with the Composite PMI rising to 51.7, suggesting broad-based economic growth. This unexpected strength in the PMI report bolstered the USD, as it indicated robust demand and an ongoing recovery in the manufacturing sector.

The US Federal Reserve (Fed) has maintained a cautious stance, with officials advocating for one rate cut this year, contingent on continued inflation moderation. Despite this, market participants are increasingly betting on two rate cuts by the Fed in 2024, with the CME FedWatch tool indicating a 64% probability of a rate cut in September.

Technical Analysis

The GBP/USD pair's recent movements signal a bearish outlook. The pair fell below the significant psychological level of 1.2700 and struggled to maintain the 61.8% Fibonacci retracement support at 1.2667, a level drawn from the March 8 high of 1.2900 to the April 22 low of 1.2300. This failure to hold above the crucial retracement level indicates a lack of bullish momentum, further reinforced by the pair's position below both the 20-day and 50-day Exponential Moving Averages (EMAs), which are positioned around 1.2700 and 1.2670, respectively.

The Relative Strength Index (RSI) for 14 periods has also retreated into the 40.00-60.00 range, suggesting that the upside momentum has faded significantly. This RSI behavior often indicates a period of consolidation or a potential reversal in trend direction. Given the current market conditions and technical indicators, the bearish outlook is reinforced by the overall market sentiment and fundamental data.

If the GBP/USD continues to trade below 1.2700, it is likely to test the next significant support level at 1.2580. A decisive break below this level would likely open the path for further declines towards 1.2480, representing the next main target. This bearish scenario remains valid as long as the pair does not breach and hold above the 1.2700 resistance level. The persistence of negative pressure formed by the moving averages and the inability to sustain any upward movements further supports the bearish trend forecast.

Conversely, a move above 1.2700 would invalidate the current bearish setup. If the pair manages to close above this resistance, it could signal a potential reversal of the downtrend and a return to a bullish trajectory. In this scenario, the initial target would be the 1.2800 level, followed by a move towards the March 8 high of 1.2900. However, given the current technical and fundamental landscape, the likelihood of this bullish reversal appears limited unless there are significant changes in market dynamics or economic data.

TRADE RECOMMENDATION

SELL GBPUSD

ENTRY PRICE : 1.2640

STOP LOSS : 1.2700

TAKE PROFIT :1.2480

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Pound Sterling Faces Pressure from Weak PMI and Strong Retail Sales

UK Economic Data: Mixed Signals

Bank of England's Cautious Stance

US Economic Data: Strong PMI Boosts USD

Risk Disclosure