Strong UK Retail Sales Keeping GBP/USD Supported For Now

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Strong UK Retail Sales Keeping GBP/USD Supported For Now

The GBP/USD has been consolidating since mid-November. A month later, after many choppy moves, cable has ranged roughly between 1.5541 and 1.5825. This week, the pair pair fell back to the range support.

GBP/USD 4H Chart 12/18
Strong UK Retail Sales Keeping GBP/USD Supported For Now
(click to enlarge)

After stalling above 1.5541 during the end of the 12/17 session, we got a much stronger-than-expected retail sales report from the UK:

Retail Sales m/m (November): 1.6%
Forecast: 0.3%
Previous: 1.0% (revised from 0.8%)
uk retail sales 12/18
(click to enlarge; source: forexfactory.com)

The strong reading follows a decent reading in October, and is the first back-to-back gain of significance in 2014. Retail sales is historically a volatile data point but we have seen the negative readings become less intense throughout the year. (readings up to 0.2%, I consider too close to being flat to be significant).

Now, while this data point is impressive, it has less impact on the BoE’s policy decision process than the inflation report we had earlier in the week, which showed a 1.0% annual CPI inflation in November. The forecast was around 1.2%, and the previous reading was 1.3%. The 1.0% print was the lowest inflation reading in 12 years!

inflation uk nov 2014
(click to enlarge; source: Office of National Statistics)
Now, this inflation report was mixed in with a positive jobs report. But, in the end, the inflation concern should be highlighted because it has a strong implication for the BoE’s delaying its rate hike time-frame.

Now, from the USD side, we had the FOMC Monetary Policy Statement, which for the most part continues to affirm a rate hike by mid-2015. Not a surprise here, and the USD got back its groove at least for the short-term. Despite some low inflation data earlier, the FOMC’s tone gave the market appetite for the greenback.

GBP/USD Reactions: 
Looking back at the 4H chart, we can see the reactions to the data points this week. First of all GBP/USD did not fall immediately after poor UK inflation data. At the time, the USD was sliding across the board, so GBP/USD gained. However, the poor inflation report was a drag, and GBP/USD was unable to clear above the 1.5750 pivot which represents the December resistance area. The market faded GBP/USD surrounding the FOMC event, but it stalled as GBP/USD tested the 1.5541 range low and low on the year. After the UK Retail Sales data, we had a rebound away from the range support, and low on the year

Bearish Continuation Scenario: While intra-session support can be expected, the GBP/USD still looks pressured as long as it remains below 1.57. A break above 1.57 puts it back into a consolidation mode and shelves the bearish continuation scenario, which appears to be developing at the moment.

Price Bottom Scenario: Now, a push above 1.57 will likely represent USD-weakness more than GBP-strength. Still that would be enough to keep cable in sideways mode, with upside risk to 1.5825. A break above 1.5825 then, can then introduce the idea that GBP/USD has formed a bottom.

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Fan Yang has been a professional forex trader and analyst since 2007. He specializes in technical analysis and has a Chartered Market Technician designation since 2011. He was the chief technical strategist at CMSFX He was also the founder and chief currency strategist at FXTimes Over the years, Fan has not only been a trader and analyst but also an educator. As a proponent of both technical and fundamental analysis in trading, Fan advocates simplicity and discipline as key factors in making trading decisions when faced with so many "clues" and "signals". Currently Fan Yang is the chief currency analyst and webinar instructor at forexminute.com.