British Pound languishes at seven-week lows despite bright UK Retail Sales data

• GBP/USD flatlines around 1.3365, at seven-week lows, on track for a 1.15% weekly decline.
• The diverging monetary policy decisions by the Fed and the BoE have crushed the pair this week.
• UOB experts see the Pound vulnerable while below 1.3435.

The British Pound (GBP) has ticked up against the US Dollar (USD) on Friday, following an unexpected increase in UK Retail Sales. The GBP/USD pair, however, remains on its back foot, trading at 1.3370, ahead of the London session opening, on track for a 1.15% weekly decline, crushed by the diverging monetary policy decisions of the Federal Reserve (Fed) and the Bank of England (BoE) earlier this week.

Data released by the UK National Statistics Office on Friday revealed that retail consumption rose 0.5% in August, against expectations of a 0.2% contraction, to reverse July's 0.5% decline. The report also showed that the increase was widespread, as excluding fuel, sales of all other products rose 0.6%, also against the market consensus that had anticipated a 0.2% drop.

The Pound dropped across the board on Wednesday, as the BoE left its Bank Rate steady at 3.75%, as expected, with three committee members calling for a rate hike, in an identical vote split to July’s meeting. 

The minutes of the meeting hinted at a rate path in the coming months, as BoE Governor Andrew Bailey acknowledged that monetary policy might need to be tightened further “if the Middle East conflict persists, as appears to be the case, and the risk of second-round effects emerging increases.” These comments, however, failed to provide any relevant support to the Pound.

US Dollar rallied as Fed hawkishness took markets by surprise

In the US, the Federal Reserve showed a much more hawkish stance, hiking interest rates by 25 basis points to the 3.75%-4% range, and Chairman Kevin Warsh reaffirmed that inflation is the bank’s main focus, which was interpreted by the market as a sign that more tightening is on the pipeline. 

These comments prompted investors to ramp up bets of at least one more rate hike this year to a nearly 90% chance, according to figures by the CME's FedWatch Tool, and helped to restore credibility on the central bank's independence. This has boosted the US Dollar has rallied across the board.

Strategists at UOB Group note that “while the (GBP) risk remains on the downside, conditions remain deeply oversold, and it is unclear whether GBP has sufficient momentum to reach 1.3300.” On the topside, they argue that “a breach of the ‘strong resistance’ at 1.3435 (level was at 1.3460 yesterday) would indicate that the weakness in GBP is stabilising,” reinforcing the view that any sustained recovery would first need to overcome this key technical hurdle.