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Summary: The British pound remained in a downtrend this week, but the volatility was not significant. This decline occurred following the release of inflation data in the UK. As the bearish momentum approaches the previous uptrend point, we believe the downward trend will gradually ease.

Fundamentals

UK retail sales grew by 0.7% year on year in June, far surpassing the expected 0.2% growth. Retail sales also rose by 0.7%. During the month, all major sectors (food, non-food, and non-store retailing) saw an increase in sales, excluding automotive fuel.

Specifically, food sales contributed 0.3% to the growth in retail sales for the month, while non-food sales contributed 0.4%. Non-store retailing and fuel sales remained unchanged from the previous month. However, there is still a considerable gap between retail sales volume and retail sales value.

Quarterly comparing the three months ending in June to the previous three months ending in March, sales volume increased by 0.4%, and sales value increased by 1.7%.

However, when compared to the same month last year, sales volume declined by -1.0%, while sales value grew by 4.3%.

Following the release of lower-than-expected inflation data for June on Wednesday, the pound weakened. However, the pound should recover against the U.S. dollar in the coming months. The recent decline in the pound was due to investors lowering their expectations of a rate hike by the Bank of England, but these expectations have become unrealistic.

In our view, this adjustment will not alter the overall outlook for the pound, and the GBPUSD exchange rate is likely to rise in the next few months. The time needed for the normalization of UK inflation should be longer than that of the U.S., which could be a key supporting factor for the pound. Additionally, this report slightly downplayed the data for May, but the strong performance in June should provide a brief boost for the pound.

Technical Analysis

The GBPUSD has extended its retracement from the 2023 high of 1.3142 for six consecutive days. As the situation develops, the asset is expected to break free from the fifth wave of the "downward impulse waves", seeking mean reversion after the significant surge in the previous period. Will the market unfold as we anticipate?

For sure anything is possible. The oversold stochastic oscillator supports the continuation of this condition. Meanwhile, a bearish crossover is forming in the daily timeframe. As the U.S. dollar continues to strengthen and weigh on the pound, any consolidation or rebounds are likely to attract more bearish sentiment.

Overall, in the corrective trend, the asset seems to be forming the final wave of the downward impulse waves. Although we believe the asset will continue to rise in the coming months, in the short term, a neutral to bearish stance is more appropriate. In terms of trading strategy, it is recommended to focus on going short at highs.

Trading Recommendations

Trading Direction: Short

Entry Price: 1.2860

Target Price: 1.2666

Stop Loss: 1.2973

Valid Until: 2023-08-04 23:55:00

Support: 1.2843, 1.2801, 1.2750, 1.2720

Resistance: 1.2904, 1.2931, 1.3000, 1.3041