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Summary: The GBPUSD remained under bearish pressure on Friday, with mixed PMI data from the UK failing to boost the GBP after disappointing retail sales data was released. It traded below 1.2400 during the European session. The S&P Global PMI will appear in the U.S. economic outlook during the day.

Fundamentals

U.K. quarterly retail sales in March posted a monthly rate of -0.9%, below expectations of -0.5%. Sales excluding fuel declined 1%, both below the market's general expectations.

In terms of UK consumer activity, this is another dampening factor, and it is difficult to see much improvement in the coming months as high inflationary pressures continue to weigh on households. On a breakdown basis, non-food sales fell by 1.3% and sales of food fell by 0.7%.

Meanwhile, non-physical retail sales (mainly online sales) also fell by 0.8% in March. As the Bank of England faces pressure to tighten policy further, it faces the risk that consumers will come under greater pressure and risk a more severe recession later this year.

With food prices rising at the fastest rate in over 45 years, there is a marked difference between retail sales volumes and sales value in UK food stores. As retail sales activity in the UK continues to be sluggish, the average household is spending more money in food stores, but buying less.

The current cost-of-living crisis in the UK is a key issue. With UK inflation continuing to remain in double digits in March, the Bank of England is under pressure to raise interest rates further in the coming months. However, tight monetary policy and further tightening of the fiscal position will put further pressure on households along with high inflation, which is a vicious cycle for everyday consumers.

In mixed data, UK manufacturing PMI for April recorded 46.6, higher than the expected 48.5, but still at a four-month low. Services PMI for April recorded 54.9, higher than the expected 52.9 and at a one-year high. The composite PMI for April recorded 53.9, higher than the expected 52.5.

The GBPUSD remained underperforming on the last trading day of the week after the release of disappointing monthly retail sales data and mixed UK PMI data. With the focus turning to the last major economic data of the week, the U.S. S&P PMI, a corrective rally may be expected for the asset.

Over the next 1-3 weeks, our most recent expectation (as of April 17) was that GBPUSD would likely consolidate around the 1.2400 level. Among other things, the GBP could move slightly lower, but any decline is unlikely to break significantly below major support at 1.2275. However, the GBP's failure to make any progress to the downside (in line with our expectations) means that downside pressure has subsided and the asset may see a corrective rebound.

Technical Analysis

The channel breakout to the upside for GBPUSD bulls proved to be short-lived. The asset managed to hit a high of 1.2546 on April 14, 2023 but has since returned to the range-bound oscillation formed since November 21, 2022. This range trading has led to the tightening and convergence of the Bollinger bands, and a breakout in one direction would likely be substantial.

Momentum indicators can provide some clues about the next move. With the Average Directional Movement Index (ADX) confirming the trendless nature of GBPUSD, the focus will shift to the RSI and Stochastic Oscillator. The former is just above the midpoint, which is a sign of market balance. However, the Stochastic Oscillator has a more interesting phenomenon. It has fallen below its moving averages and overbought territory. A more aggressive fall could be the signal that the bears have been waiting for.

If this situation occurs, GBPUSD bears could face support at the 50% Fibonacci retracement level of the June 1, 2021-September 26, 2022 downtrend at 1.2287. Even lower, the 50-day SMA and the 100-day SMA in the 1.2186-1.2189 area would be their second target.

On the other hand, GBPUSD bulls are set for another upside breakout and a retest of the April 14, 2023 high at 1.2546. If they manage to break above this level, they could be aiming for the 61.8% Fibonacci retracement level of 1.2750. The path is relatively clear before the bulls reach the December 8, 2022 low at 1.3160.

Overall, the failed breakout to the upside increases the importance of the current range oscillation. The bulls are more than willing to test the recent highs again, but the overall technical picture does not support them. And that's okay, our bottom line is that we can't fall below the 1.2274 level. As long as the asset remains above that level, the uptrend remains in place. It is recommended to buy the dips.  

Trading Recommendations

Trading Direction: Long

Entry Price: 1.2400

Target Price: 1.2666

Stop Loss: 1.2270

Valid Until: 2022-05-05 23:55:00

Support: 1.2377, 1.2345, 1.2274

Resistance: 1.2471, 1.2546, 1.2666