GBP drops on decline in UK retail sales figures

Last week, the British Pound (GBP) started off on a weak note due to an unexpected decline in UK retail sales, which weighed on the currency and countered expectations of higher interest rates. Throughout the week, there was a lack of significant data releases that limited the potential for Sterling's performance.

As a result, attention shifted to economic concerns within the UK, with the stability of the economy coming under scrutiny due to the potential for ongoing interest rate hikes by the Bank of England (BoE).

In the middle of the week, the UK water sector faced pressure as Thames Water revealed a debt of over £10 billion. Speculation about a substantial bailout negatively impacted investor sentiment towards the UK economy.

However, on Friday, an optimistic market sentiment combined with confirmation that the UK economy had avoided a winter recession provided support for Sterling, allowing it to gain strength against other currencies.

Looking ahead to the next week, the Pound (GBP) is not expected to see any significant data releases. Consequently, Sterling may struggle to establish a strong position throughout the week's trading session.

Nevertheless, as a currency sensitive to risk sentiment, if market mood improves during the week, Sterling may strengthen against the safer Euro.

According to the Confederation of British Industry (CBI), retail sales in June continued to decline, indicating a second consecutive month of reduced activity. With high inflation rates, consumer spending has been significantly affected.

The mounting concerns about the central bank's actions potentially pushing the UK into a recession further weighed on Sterling and discouraged investors. The BoE's persistent interest rate hikes are straining the economy, and there are concerns that this could lead to a prolonged and mild recession by the end of the year.

During a speech at the European Central Bank (ECB) Forum for Central Banking, the BoE Governor's hawkish remarks failed to rally GBP investors. Andrew Bailey reiterated the central bank's commitment to bringing inflation down to the target level of 2%.

At the end of the week, the final GDP growth rate provided reassurance to investors as it confirmed that the UK managed to avoid a winter recession. Although the growth was modest at 0.1%, the absence of a second consecutive month of economic contraction prevented a recession from occurring.

EUR

The Euro (EUR) started the week on a negative note as German business sentiment fell more than expected, putting pressure on the common currency. Despite growing caution, the Euro struggled to make significant gains throughout the session.

However, following a speech by European Central Bank (ECB) President Christine Lagarde on Tuesday, the Euro managed to climb as investors reacted to her hawkish comments and anticipated further tightening from the ECB.

Nevertheless, the Euro's upward momentum was limited once again by weak German data. A pessimistic consumer confidence reading weighed on the common currency.

On Thursday, despite a higher-than-expected increase in German inflation, the Euro faced challenges in gaining significant ground. This was mainly due to its negative correlation with the US Dollar (USD), which strengthened during Thursday's trading.

On Friday, the Euro received modest support, even though the Eurozone's headline inflation reading cooled more than anticipated, as the EU's labor market remained tight, staying at historically low levels.

Looking ahead to the next week for the Euro (EUR), the data calendar is relatively light in terms of impactful releases.

As a result, before the release of German Factory Orders data on Thursday, the single currency is likely to lack clear directional trading. However, if the market sentiment turns negative, the Euro could strengthen.

The forecast for these factory orders suggests a significant recovery with a projected increase of 1.5%. If this materializes, it could boost confidence among EUR investors by indicating a recovery in the largest economy of the Eurozone.

Shortly after, the latest Eurozone retail sales data will be released. Economists currently predict a 0.2% monthly increase in May, which could provide support for the common currency.

On Friday, the latest German industrial production data may influence the direction of the Euro. Forecasts indicate a slowdown from 0.3% to 0.1% in May's production, which could lead to weakness in the EUR.

USD

Meanwhile, the US Dollar (USD) nearly ended the week on a high note, having strengthened consistently throughout the week. However, the Federal Reserve's preferred measure of inflation came in lower than expected, which dampened expectations of interest rate hikes.

At the beginning of the week, the US Dollar struggled to gain much demand due to a lack of significant economic data. However, Fed Chair Jerome Powell's remarks on monetary policy during the ECB Forum on Central Banking provided a boost to the "Greenback." Powell reiterated the central bank's commitment to combating inflation and hinted at the possibility of further rate hikes.

Moreover, a deteriorating market sentiment following disappointing Chinese data and concerns about a global economic slowdown increased demand for safe-haven assets, supporting the US Dollar.

Data for the week ahead

Monday

01:45 CNY Caixin Manufacturing PMI

06:30 CHF Consumer Price Index

14:00 USD ISM Manufacturing PMI

Tuesday

04:30 AUD RBA Interest Rate Decision

Wednesday

01:45 CNY Caixin Services PMI

18:00 USD FOMC Minutes

Thursday

01:30 AUD Trade Balances

09:00 EUR Retail Sales

12:15 USD ADP Employment Change

14:00 USD ISM Services PMI

Friday

12:30 USD Average Hourly Earnings

12:30 USD Nonfarm Payrolls

12:30 CAD Net Change in Employment

12:30 CAD Unemployment Rates

16:45 EUR ECB’s President Lagarde Speech

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