The pound sterling is falling on moderate growth in UK retail sales

Sterling is under pressure as growth in UK retail sales data for November was lower than expected.
AND more BoE officials voted in favor interest rate cut on Thursday, which strengthened dovish forecasts for 2025.
Investors are waiting for US PCE inflation data for November, which will include recent information on Fed interest rates.

On Friday, the pound sterling (GBP) hit a recent seven-month low near 1.2470 against the US dollar (USD). GBP/USD weakens as the US Dollar Index (DXY) refreshes a two-year high around 108.50 earlier in the day, but gives up intraday gains during European trading hours ahead of the US Consumer Expenditure Price Index (PCE) November data to be published at 13:30 GMT.

Investors will be paying close attention to PCE inflation as Federal Reserve (Fed) officials are more concerned about halting the progress of disinflation than about the risk of a deterioration in employment. U.S. core PCE inflation, the Fed’s preferred measure of inflation, is estimated to have risen at a faster pace – 2.9% from 2.8% in October. Month-on-month core inflation data is expected to raise by 0.2% compared to 0.3% in October.

The outlook for the US dollar has strengthened. At Wednesday’s policy meeting, the Fed cut key interest rates by 25 basis points (bps) to a range of 4.25-4.50%, in line with expectations, but opted for a slower rate cut trajectory in 2025. The Fed’s scatter plot showed that officials collectively see federal funds rates will rise to 3.9% by 2025, up from 3.4% forecast in September.

The Fed has signaled fewer interest rate cuts next year as officials remain confident of mighty economic growth. This forced them to be cautious about further policy easing. Meanwhile, the third estimate of gross domestic product (GDP) for the third quarter was higher at 3.1% compared to the second estimate of 2.8%.

Daily Market Change Summary: Pound Sterling Will Be Impacted by US PCE Inflation

Sterling performed poorly compared to its main competitors on Friday after the release of UK retail sales data for November, which rose less than expected. Retail sales data, a key measure of consumer spending, rose 0.2% in the month, slower than estimates of 0.5%, but recovered from a 0.7% decline in October.
Retail sales grew at a moderate pace of 0.5% year-on-year, compared to expectations of 0.8% and the previous publication of 2%, which was revised down from 2.4%. The report showed that demand for clothing remained feeble, while sales at other non-food stores were higher.
The Office for National Statistics (ONS) said November figures did not take into account the impact of the Black Friday sale because it started on November 29. The agency analyzed the data for four weeks, from October 27 to November 23.
The outlook for the British currency is already uncertain as Thursday’s Bank of England (BoE) monetary policy meeting showed a dovish stance on the monetary policy outlook. The BoE left its key interest rate unchanged at 4.75%, as expected, as UK inflation has accelerated over the past three months. Despite this, three policymakers proposed a reduction in interest rates compared to one, in line with the expectations of market participants.
BoE Governor Andrew Bailey refrained from adopting a predetermined path of interest rate cuts. “Due to increased uncertainty in the economy, we cannot determine when or by how much we will reduce interest rates in 2025.” – he said.
Meanwhile, investors are pricing in a 53 basis point (bps) rate cut by the BoE in 2025 after the policy announcement.

Technical analysis: Pound sterling falls towards 1.2300

Sterling is weakening against the US dollar with a decisive break below the rising trendline around 1.2600, which is drawn from the October 2023 low of 1.2035.

The death cross, represented by the 50-day and 200-day exponential moving averages (EMA) near 1.2790, suggests a mighty downtrend in the longer term.

The 14-day relative strength index (RSI) is falling below 40.00, suggesting that a recent downtrend has started.

Looking down, the pair is expected to find a cushion near the April 22 low around 1.2300. On the other hand, the December 17 high at 1.2730 will be a key resistance.