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Summary: The UK's GfK Consumer Confidence Index for August registered at -25, surpassing the expected -29. Nevertheless, the index remains in negative territory as the prospect of rising interest rates weighs on the economic growth outlook, causing the GBPUSD to hit an 11-week low.

Fundamentals

Consumer confidence rebounded in the UK for August as signs of cooling inflation and robust wage growth boosted household finances. Today's released data revealed the UK's GfK Consumer Confidence Index at -25, beating the market's expectation of -29.

The improvement is attributed to the alleviation of the cost of living crisis, driven by declining energy prices and accelerating wage growth. The past month's drop in mortgage rates and the decrease in energy prices in July have contributed to boosting confidence.

These figures stand in stark contrast to the steep decline in July retail sales. While industry surveys suggest that UK retail sales could continue to decrease, consumer confidence has steadily risen throughout the year, apart from July. This growth reflects the slight expansion of the country's economy rather than the severe recession many had anticipated last year. Despite the UK's financial vulnerabilities, these optimistic signs are welcomed during this challenging period.

Meanwhile, the data suggests that the "cost of living crisis may be ending." However, due to further increases in unemployment, declining house prices, and ongoing rising interest rates, consumer confidence might deteriorate again in the coming months.

To combat persistent inflation, the Bank of England has raised interest rates to 5.25%, with the impacts of a historically aggressive tightening cycle continuing to expand. Depressed market sentiment and escalating risks of a UK economic recession have kept the British pound under constant selling pressure (GBPUSD hit an 11-week low during the Asian session on Friday). The consequences are affecting consumption information for UK businesses and individuals, leading to declarations of bankruptcy due to an inability to meet interest obligations.

We anticipate that the Bank of England might focus more on downside risks to economic growth in its upcoming policy adjustments, rather than the risk of ongoing above-target inflation. The current interest rate level stands at 5.25%, with expectations that UK rates might peak around 5.5%-5.75%. Refinitiv data indicates that the current market expectation for the peak of the Bank of England's interest rates is 5.80%, with a probability of over 90% for a 25-basis-point rate hike in September.

Technical Analysis

After closing below the key support level of 1.2615 and falling beneath the 100-day SMA on Thursday, the GBPUSD intensified its subsequent selling pressure. Friday saw the pair hit an 11-week low near 1.2560.

With a bearish crossover of the 20-day and 50-day EMAs, the asset faces potential further downward momentum. It is anticipated to extend downward towards the 200-day SMA at the 1.2480 level. Simultaneously, the momentum (oscillator) indicator signals that the bearish impulse has been triggered, reflecting the latest market dynamics.

However, the asset has found temporary relief in the downside support provided by the 100-week SMA. Does this suggest the asset might continue its descent?

Looking at the price action of the asset (as shown in the chart), GBPUSD might replicate the accelerating uptrend observed after the previous two minor breakouts. If so, the bulls could potentially find strength in the 100-week SMA for an upward surge. The confirmation of this scenario will hinge on the catalyst provided by Fed Chairman Powell's speech at the Jackson Hole Economic Symposium. (For reference only, exercise caution.)

Trading Recommendations

Trading Direction: Long

Entry Price: 1.2560

Target Price: 1.2965

Stop Loss: 1.2400

Valid Until: 2023-09-08 23:55:00

Support: 1.2548, 1.2460, 1.2428

Resistance: 1.2615, 1.2714, 1.2750