GBPUSD Rate Remains Below 1.26, As UK Shop Prices Continue to Fall

The GBP/USD pair has faced significant selling pressure since early October, primarily driven by the Federal Reserve’s hawkish stance and weak UK economic data. Over this period, the pair has dropped nearly 10 cents, falling below the 1.25 mark last Friday. The decline followed the US Services PMI’s strong expansion, contrasting sharply with the contraction in the UK’s services sector for November, hinting at a potential recession in the UK.

GBP/USD Chart H4 – The Rebound  Ended at the 50 SMA

A temporary bullish gap of 60 pips emerged on Monday, fueled by positive market sentiment. This was sparked by Donald Trump’s selection of a market-friendly Treasury Secretary and rumors of a potential Israeli-Lebanese peace agreement. However, the sentiment reversed during the US trading session after Israel failed to provide details about the deal. Risk assets, including stocks, declined, and the pair faced resistance at the 50 SMA (yellow) on the H4 chart, which pushed the price back below 1.26 amid renewed USD strength.

Weak Retail Sales in the UK

UK retail sales data has painted a concerning picture. October retail sales fell more than anticipated, with September figures also revised downward. This points to continued weakness in the retail sector as it struggles to recover, particularly in the lead-up to the holiday season. Retail sales volumes in October 2024 remained 1.5% lower than February 2020 levels, underscoring the sector’s sluggish performance compared to pre-pandemic times.

Inflation and Bank of England’s Response

Last week’s inflation data showed unexpected monthly increases in UK consumer prices:

• Headline CPI: Rose by 0.6%, above the forecast of 0.3%.
• Core CPI: Increased by 0.4%, surpassing the predicted 0.3%.

Despite these higher-than-expected figures, the Bank of England maintained its existing interest rate policy, attributing the rise to a one-off event rather than a broader trend. So, the GBP/USD pair remains under pressure, with the USD’s strength and the UK’s economic challenges weighing heavily. While temporary rebounds may occur, driven by sentiment or geopolitical developments, the broader trend suggests continued vulnerability for the pound as economic indicators remain weak and market confidence wanes.