United Kingdom FX Today: Pound Sterling plunges, will Retail Sales change the situation?

Pound Sterling (GBP) is trading sharply lower against the US Dollar (USD), with the cable losing 0.4% on the day at 1.3567. The fall in GBP/USD is largely fueled by a global rebound in the USD, while the Bank of England (BoE) meeting earlier this Thursday failed to surprise markets.

Despite a moderate rally in recent sessions, the GBP remains under pressure as UK macroeconomic indicators send out mixed signals.

With the release of Retail Sales by the Office for National Statistics (ONS) on Friday at 06:00 GMT expected to confirm a softer consumer momentum than at the start of the summer, market operators are looking to assess whether this cyclical trend could put the brakes on the GBP's eventual recovery.

Fragile British consumption

Forecasts for August Retail Sales are generally down on the previous month. The market is expecting a rise of just 0.4% month-on-month (versus 0.6% in July) and 0.6% year-on-year, almost half the pace seen previously (1.1%). Excluding fuels, the trend remains similar, with growth of 0.3% MoM forecast, compared with 0.5% in July.

This moderation follows a major technical correction made by the ONS to its seasonally-adjusted data. In its latest report, the statistical institution states that "Retail Sales volumes fell by 0.6% over three months to the end of July", breaking a sequence of four consecutive months of growth.

July's one-off rebound may prove short-lived, and August's figures will be decisive in confirming or denying this trend.

Among the sectors that had underpinned the summer recovery were non-food retailing, notably clothing, online sales and electronic goods, boosted by the mild weather and the Euro 2025 women's effect.

But according to the Guardian, the outlook for UK retailers has darkened, not least because of concerns over possible tax hikes before Christmas.

As Helen Dickinson, chief executive of the British Retail Consortium (BRC), recalled in a report published on September 9: "Despite a strong summer, retailers are approaching the fourth quarter with caution. The government's budget due at the end of November, just before Black Friday, raises uncertainties that could weigh on consumer confidence."

This caution is also reflected in the Consumer Confidence Index, down for the third consecutive month in August, as households anticipate a further surge in food inflation and rising energy costs.

As Sarah Bradbury of the Institute of Grocery Distribution summarized in the Guardian: "Glimmers of hope exist, between lower rates and easing on home loans, but consumers remain under emotional and financial pressure."

Technical analysis of GBP/USD: Bearish breakout threatens the cable

GBP/USD 4-hour chart. Source: FXStreet

The GBP/USD pair issued a bearish technical signal on Thursday, breaking its channel from below towards 1.3620. This move also triggered a bearish acceleration towards the 100-period Simple Moving Average on the 4-hour chart, which currently stands at 1.3527.

A move below could then encourage further downward pressure towards the August 11 and August 22 lows at 1.3400, before the September low at 1.3333.

On the upside, any short-term rebound must first reiterate the bullish channel above 1.3620 before considering a test of the high brone around 1.3750.