Pound Sterling rebounds, though risk-off mood keeps downside bias intact

• The Pound Sterling finds cushion near 1.2400 after mixed UK Retail Sales data for March.
• Geopolitical fears and a strong outlook for the US Dollar restrict the upside in the GBP/USD pair.
• Fed’s Bostic said he is comfortable with interest rates remaining high.

The Pound Sterling (GBP) finds a temporary support near almost five-month low around 1.2400 against the US Dollar in Friday’s London session. The US Dollar Index (DXY) struggles to sustain above the crucial support of 106.00 despite Federal Reserve (Fed) policymakers maintaining hawkish guidance on interest rates.

On Thursday, Atlanta Fed President Raphael Bostic said progress in inflation towards the 2% target will be slower than expected. Bostic also said he is comfortable with interest rates remaining high as labor demand is robust and wage growth remains resilient.

On the economic calendar front, the United Kingdom Retail Sales report for March has highlighted the consequences of higher interest rates. UK Retail Sales remained stagnant month-on-month as a decline in food and non-store retailing was offset by spending on fuel and non-food items.

Going forward, the GBP/USD pair could face pressure due to deepening geopolitical tensions after Israel reportedly launched an attack against Iran. 

Daily digest market movers: Pound Sterling rebounds while US Dollar edges down

• The Pound Sterling finds interim support near 1.2400. The near-term outlook remains weak as the market mood turns risk-off due to fears of further escalation in Middle East tensions. Israel retaliated to Iran’s attack with drones in Friday’s early Asian session, Reuters reported citing several US officials. Iranian state media said that the air defense system brought down three drones over the central city of Isfahan.
• UK Retail Sales were unchanged in March compared with the previous month, according to data from the country’s Office for National Statistics, less than the 0.3% increase forecasted by economists. In February, Retail Sales grew by a meagre 0.1%. On an annual basis, Retail Sales grew sharply by 0.8% after contracting by 0.3% in February.
• Retail Sales data indicate the current status of consumer spending, which accounts for a major part of economic growth. A stagnant performance on a month-on-month basis indicates that the BoE’s high interest rates have significantly impacted consumer spending.
• Going forward, headlines surrounding the Middle East conflict and speculation about BoE rate cuts will guide the next move in the Pound Sterling. On the latter, markets currently anticipate the BoE starting to lower rates in November as March inflation data declined at a slower pace than estimated.
• On Thursday, BoE policymaker Megan Greene said in the Atlantic Council think tank in Washington: “The numbers that we’re seeing in terms of wage growth and services inflation just aren’t consistent with a sustainable 2% (consumer price) inflation target.” When asked about a potential time frame for rate cuts, Greene said: “I don’t think it’s imminent.”

Technical Analysis: Pound Sterling aims to sustain above 1.2400

The Pound Sterling refreshes an almost five-month low near 1.2400 against the US Dollar. The GBP/USD pair is expected to see more downside as the longer-term outlook is bearish. The asset remains below the 200-day Exponential Moving Average (EMA), which trades around 1.2560. The Cable experienced a sharp downside after a breakdown of the Head and Shoulder chart pattern formed on a daily time frame.

Adding to that, 14-period Relative Strength Index (RSI) oscillates inside the bearish range of between 20.00 and 40.00, suggesting momentum leans to the downside.