Pound drifting, retail sales next

The British pound is having a quiet Thursday. GBP/USD is trading just above the 1.38 level, at 1.3816, down 0.05% on the day.

UK Retail Sales expected to decline

On Friday, the UK releases Retail Sales, the most important gauge of consumer spending. The September data is expected to be soft. The estimates (YoY) stand at -0.5% for the headline reading and -1.7% for Core Retail Sales. In August, the core reading came in at -0.9%, and back-to-back declines could dampen sentiment towards the pound.

The BoE is widely expected to raise interest rates in November, likely by 15 basis points. This would be a highly significant move, as it would mark the first rate hike by a major central bank since the Covid pandemic began in early 2020. With inflation running above 3%, well above the BoE’s target of 2%, a compelling case can be made for raising rates in order to remove the danger of inflation overheating the economy.

At the same time, central banks usually raise rates during economic booms and lower rates in order to stimulate the economy. The UK economy, which is gingerly getting on its feet as the country emerges from Covid, is clearly not experiencing an economic boom. The surge in inflation is thus not due to a hot economy, but rather from rising costs, which have been aggravated by supply-chain disruptions and the surge in energy prices.

The BoE has the tricky task of identifying whether inflation, which could top 4% before the end of the year, is transitory or not. If inflation is set to ease shortly, a rate hike would be not just unnecessary, but a risky move that could damage the nascent recovery. Some MPC members feel that the bank should wait before tightening policy. There is a concern that a rate hike (or series of hikes) could be a serious policy mistake which could tarnish the BoE’s credibility if the bank has to reverse policy and cut rates in the short term.

For now, the markets are expecting a live November policy meeting, as Governor Andrew Bailey and most MPC members are in favor of a rate hike. It will be interesting to see how the financial markets react if the BoE goes ahead and presses the rate trigger.

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GBP/USD Technical Analysis

• The pair is testing resistance at 1.3822. Next, there is resistance at the round number of 1.3900
• There is support at 1.3618. Below, there is support at 1.3492

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