Retail Sales Surprise to the Upside But Not Enough to Boost Pound

 

 

 

 

The pound bounced after the release of Retail Sales on Thursday morning, rising by 34 hundredths of a cent versus the dollar immediately following the release, but then weakening as Brexit fears eclipsed all other concerns, including a less optimistic Federal Reserve (Fed).

 

Retail Sales easily beat expectations, rising by 1.0% in May against the paltry 0.3% forecast, and a whopping 5.7% higher than a year ago in May 2015.

 

According to one headline, the message appeared to be that "British consumers were beating the Brexit gloom", by continuing to go out shopping.

 

Traders are gearing up for the release of a Bank of England's interest rate decision later in the day, however, given the closeness to the referendum the chances of a policy change are negligible.

 

The Fed's June meeting on Wednesday, seemed to indicate it was now less likely the central bank would raise interest rates in the near future, a fact which weighed on the dollar in the immediate aftermath of the meeting.

 

The pound resumed its previous downtrend overnight, however, as still-close polls in the run up to the referendum ratcheted up fears the UK might leave the EU, an outcome expected to lead to a 15-20% devaluation in sterling.

 

Businesses are becoming increasingly concerned about a Brexit and are opting to hedge their future sterling liabilities - or investments in an effort to negate any potential  losses due to a expected collapse in the pound's exchange rate, following a vote to leave.

 

From a technical perspective the GBP/USD pair appears to be finding support at a significant line at 1.4150, which was previously the neckline of a major bottoming pattern, called an inverse  head and shoulders -  a pattern which normally denotes a bullish outlook, however in this case that proved short-lived.

 

If this neckline is definatively breached it would increase the bearishness of the chart. 

 

Major support at 1.4089 (S2 monthly pivot) could lead to a bounce or consolidation at that level.

 

A move below 1.3990 would probably confirm a stronger break lower, probing the 1.3830 lows, with a conservative target at 1.3850.

 

Lloyd's Commercial Banking's Robin Rankin was cautiously optimistic GBP/USD might find a foothold at current support and bounce back up to 1.43:

 

"While intra-day studies are unwinding from "oversold" we couldn't rule out a move back towards the 1.43 region, but a break of 1.4205 is needed to open this potential."

 

Commerzbank's Karen Jones is less bullish, dismissing the "small bounce" as unlikely to germinate:

 

"GBP/USD has seen a small bounce, however rallies should struggle circa 1.4240/1.4330 and following the recent erosion of the 4 month uptrend should then come under pressure."

 

Tough support between 1.4083/05 (note not far from our 1.4089 pivot support) needs to be overcome to open the way up down for a retouch of the 1.3830 lows.

 

As far as EUR/GBP goes, despite the strong short-term up-trend, the formation of an "evening doji star" appears to be warning of possible pull-back on the horizon.

 

The pair has also reached the minimum expected target following the breakout above a major trend-line/out of a channel at 0.7790.

 

Support at 0.7900 is likely to cap any losses.

 

A clear break above 0.8000 -  denoted by a move above 0.8040 would probably indicate a continuation up to the 0.8100 level, at just below the '117' peak.

 

Commerzbank's Karen Jones, sees the pair as "bid", taking a bullish line, suggesting the 0.7998 Fibonacci retracement (0.786%) presents a last line of defence before the 0.8117 peak.

 

Lloyds's Robin Wilkins is similarly bullish:

 

"Risks remain to the upside after breaking 0.7947 resistance. UK versus European bond spreads are breaking levels that support further gains in this cross-rate, but so far we are still holding resistance at 0.7990/0.80. A break is needed to open a move back to the 0.8117/0.8200 key long-term resistance."