Pound shrugs off soft UK Retail Sales

The British pound is flat in the Friday session. GBP/USD is currently trading at 1.3792, down 0.03% on the day.

UK Retail Sales contracts for second consecutive month

After posting stronger than expected data this week, today’s UK Retail Sales release was a major disappointment. The headline reading came in August came in at -0.9%, following a -2.5% decline in July. The consensus called for a 0.5% gain. Investors did not hit the panic button after the soft release, as the pound is unchanged on the day.

Earlier this week, inflation and employment data was positive, signalling that the UK economy continues to strengthen, despite the economic toll from the Covid pandemic. Still, the fact that retail sales, the primary gauge of consumer spending, has contracted for two successive months is certainly a concern for investors.

The Bank of England is in no hurry to raise interest rates, and the weak retail sales report will serve as ammunition for those members who are leaning towards a dovish, wait-and-see stance. The reopening of the UK economy in July predictably triggered a spike in inflation in August, and the BoE, copying the Federal Reserve’s stance, has stated that it expects the jump to be transient. It appears that BoE monetary policy will be largely data-driven, as policymakers wait for additional data in order to get a better feel of the strength of the economy.

The markets are digesting a stronger-than-anticipated US retail sales report. The gain of 0.70% beat the consensus of -0.70%. Although not a huge gain by any means, the reading has ignited expectations of a Fed taper, perhaps at the November policy meeting. The FOMC meeting next week will be closely monitored, with the markets looking for clues as to whether the Fed is ready to press the taper trigger at the November meeting.

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GBP/USD Technical Analysis

• There is resistance at 1.3904. Above, there is resistance at 1.3978
• On the downside, we have support at 1.3742 and 1.3654

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