Sterling slips on soft retail sales

The British pound continues to lose ground and has dropped below the 1.39 level on Friday. In European trade, GBP/USD is trading at 1.3880, down 0.31% on the day.

Pound sees red after FOMC meeting

It has been a dreadful week for the pound, the US dollar continues to make inroads in the wake of the FOMC shocker. GBP/USD has fallen 1.67% this week, and unless the pound shows some life before the weekend, it will be the pound’s worst weekly showing since September 2020.

The pound’s downturn has continued on Friday, after a disappointing retail sales report for May. The markets were sorely disappointed as headline Retail Sales came in at -1.4% m/m, (+1.6% estimate), with Core Retail Sales even lower at -2.1% (+1.5%). On an annualized basis, the headline and core releases were above 20%, but these still missed expectations. These figures are distorted, as they are in comparison to data from May 2020, at the height of the Covid pandemic.

The Fed’s new message to the market is that the economy is recovering faster than expected, and the Fed revised upwards its growth and inflation projections at the FOMC meeting. This could mark the start of a significant shift in policy, as the new buzzword investors may start seeing is ‘policy normalisation’.

It will be interesting to see if the FOMC meeting, which shocked the financial markets, has any bearing on the BoE policy meeting next week. The BoE is expected to reiterate that higher inflation is transitory. Yet let’s not forget that was the same message that the Fed was drumming until this week, before its abrupt shift. The BoE is not unlikely to follow suit with such a sharp shift in policy, but a more hawkish stance than expected could lift the British pound.

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GBP/USD Technical Analysis

• 1.3945 has switched to resistance as the pair falls lower. Higher, there is resistance at 1.4010
• On the downside, there is a key monthly support level at 1.3648

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