The British pound continues to lose ground and has fallen below the 1.20 line for the first time since July 26th. GBP/USD is trading at 1.1996 in the North American session, down 0.47%.
Pound eyes UK retail sales
It has been a busy economic calendar in the UK this week. Retail sales will wrap things up on Friday, with the markets bracing for more bad news from the consumer spending front. Retail Sales fell 5.8% YoY in June, and the forecast for July stands at -3.3%.
A continuing decline in consumer spending shouldn’t be a surprise, given the grim economic picture. Headline inflation rose to 10.1% YoY in July, up from 9.4% in June and above the forecast of 9.8%. The BoE has been raising interest rates in an effort to curb inflation, but don’t hold your breath. The central bank has warned that it doesn’t expect inflation to peak before it hits a staggering 13% in October. As well, real wages fell 3% in Q2, making it even harder for workers to keep up with the cost-of-living crisis, and the energy price cap will increase substantially in October. The British consumer is trying to ease the pain by cutting back on spending, but this will hurt the economy and could cause the economy to tip into a recession even faster.
The FOMC minutes on Wednesday didn’t contain anything unexpected. The minutes reiterated that monetary tightening would continue until inflation eased significantly. Meeting participants noted that the pace of rate hikes would ease once inflation cooled down. They also said that inflation is not showing signs of peaking. The markets do not appear to have absorbed this hawkish message, with the surprise drop in US inflation resulting in the markets expecting a U-turn in Fed policy. This has led to gains in the equity markets and a downward trend for the US dollar.
- GBP/USD is testing support at 1.2030. Below, there is support at 1.1925
- There is resistance at 1.2153 and 1.2258
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