GBP/USD Bounces Off Support on Strong Retail Sales

The volume of British sales grew by a solid 1.1% exceeding early estimations of a 0.9% rise. Also last month’s rise was revised to the upside, 0.3% from 0.2%. The pound strengthens, with GBP/USD bouncing off support. Together with rising inflation, the pressures for an earlier rate hike are on the rise. Update.

The government’s austerity measures triggered some market participants to fear a slower rise in retail sales. These lower expectations made the surprise bigger. Some attribute this rise to better consumer spending in Britain towards the Royal Wedding, held on April 29th, as well as warmer weather that the UK experienced during April.

GBP/USD now trades at 1.6170, up from 1.6130 before the release. Earlier in the day, the pair challenged the 1.6110 support line. At the time of writing, the pair is moving away from this level.

Yesterday, employment figures were relatively weak. Claimant Count Change showed a disappointing gain of over 12,000 jobless claims in April. This worrying figure was well above expectations. The unemployment rate for March surprised with a drop to 7.7%. The former figure is of higher importance, due to its higher reliability and earlier release date.

On the other hand, inflation continues to rage: CPI has reached an annual pace of 4.5%, the highest since the financial crisis. This exceeded expectations and has shown that the drop to 4% last month was a one time event, raising the pressures for a rate hike. Apart from headline inflation, it’s also important to note that Core CPI also jumped to 3.7%, providing evidence that inflation has expanded from energy and food prices to the whole economy. BOE governor Mervyn King focused on energy prices in his public letter to Chancellor of the Exchequer George Osborne.

The task of the British MPC (Monetary Policy Committee) remains complicated, as prices remain elevated while the economy is still dragging its legs, to say the least. This positive indicator adds to pressures for a rate hike, although rising unemployment and a slowing manufacturing sector might keep Governor King and his colleagues reluctant to make the move.

Technical support for GBP/USD is found at 1.6110, followed by 1.60. Resistance is at the 1.6280 – 1.63 region, followed by 1.6430. For more technical analysis and upcoming events, see the GBP/USD forecast.