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A package of retail sales statistics in Britain appears to have removed the last layer of support for the Pound, sending it into a dive. GBPUSD earlier today renewed its lows since 1985, dropping to 1.1350.

Fresh data showed a 1.6% m/m and 5.4% y/y drop in sales, which was noticeably weaker than the expected 0.5% m/m and 4.2% y/y decline. This upsetting surprise has added to the pressure on Pound, which has been losing 0.9% against the dollar and yen and 0.6% against the euro after the report.

There has been an almost non-stop, albeit very measured, sell-off in the Pound since August 11, with a brief pause for a shake-out of the dollar bulls’ positions. In turn, this momentum looks to be part of a downward wave since March. In that case, the GBPUSD can fall to 1.06, where the 161.8% Fibonacci mark passes from the February peaks to the July lows. It is also worth noting that this technical target is very close to the historical lows of the GBPUSD at 1.0520, which only adds to its attractiveness for the rest of the year.

Due to inflation being off the charts by historical standards, the Bank of England has much more motive to make currency or verbal interventions to buy the collapse of the Pound. This is especially true given the recent one-way movement in the British currency. As such, traders and investors should be prepared for a rate hike of more than 50 points next week, as previously done and expected. A tightening of monetary authority rhetoric is also likely.

Sterling falls further on Friday and breaks below 1.14 mark vs dollar, trading at the lowest levels since 1985 during the European session.

In addition to persisting pressure from strong dollar on expectations for another massive Fed rate hike, pound was driven lower on Friday by much weaker than expected UK retail sales, which dropped by 1.6% in August after 0.4% rise in July and also well below forecasted 0.7% fall.

August drop is the biggest since December 2021and adds to warnings that the economy is sliding into recession, as consumer spending is getting squeezed more on soaring cost of living.

Break of very important 1.14 zone (lows of post-Brexit vote fall in 2016 and pandemic in 2020) would risk stronger acceleration and unmask psychological 1.10 support.

Bearish daily and weekly studies support the action, with additional negative signal seen on formation of bearish engulfing pattern on weekly chart, though oversold condition warn that bears may take a breather before resuming.

All eyes are on two top events next week, policy meetings of the US Federal Reserve and the Bank of England.

The Fed is widely expected to deliver another 75 basis points, but with significant percentage of those who bet for a massive 1% raise, while the BoE is likely to go for another 50 basis points hike.

Res: 1.1405; 1.1450; 1.1480; 1.1521.
Sup: 1.1350; 1.1300; 1.1227; 1.1200.

At the start of next week there are two Far East data points that are important to talk about more from a perspective of technicalities. That is, they aren't expected to cause an immediate move in the currency markets, but do provide some important insights into where currencies could be going. And that based on certain fiscal and monetary technicalities that can drive markets in certain circumstances.

The economic situation in Asia is particularly complex at the moment, with direct intervention from the two largest governments in the region. The Japanese government is looking to keep the yen from becoming too weak, and the Chinese government has major control over an economy under strain from covid lockdowns. Which is why these sorts of technicalities about government policy can have such a large impact on the currency.

Why inflation isn't important in Japan

Japan's CPI is expected to move up to 2.7% from 2.4% prior, but this isn't expected to impact the market all that much. That's because there is a unanimous consensus that the BOJ will not change policy at their next meeting later in the week. Even if headline inflation is above target, and despite decades of trying to raise inflation.

That's because the inflation Japan is experiencing is the "wrong" kind of inflation. It's not driven by increased monetary circulation from economic growth, but a combination of higher global costs and increased import prices from a weak currency. While raising rates would help reduce some of the impact from inflation, it would come at the cost of hurting an economy that already isn't very healthy. The BOJ would very much like to keep easing, and use other means to deal with the problem. Such as preventing the yen from weakening too much through government intervention, as explained earlier.

China getting things in order

The Loan Prime Rate is one of the PBOC's main tools for monetary policy, particularly for supporting the economy. It amounts the interest rate on 1-year and 5-year debt, and sets the interest rates for the financial system. It's not the same as an interest rate in other countries, since it isn't applied to government debt, but private loaning. It is a major tool for regulating the cost of credit.

The lower the rate, the more support the government is seeking to supply to the economy. But, it comes at the cost of profitability for the banking sector, which in turn leaves the financial markets a little more vulnerable. The rate is now at a record low level, having just been cut a couple of weeks ago.

What to expect

Yesterday, China's bureau of statistics said it expected a rebound in low demand. And they also said something that is likely key for future monetary policy action: That core CPI might increase, particularly if the covid situation improves. That means it's less likely that the Loan Prime Rate will be cut.

The broader implications of that is companies will not have access to lower cost credit in the future. That could mean less importing of machinery from Japan, and commodities from Australia and New Zealand.

The Euro started a fresh decline from well above the 1.0150 level against the US Dollar. The EUR/USD pair declined below the 1.0100 and 1.0080 support levels.

There was close below the 1.0050 level and the 50 hourly simple moving average. The pair is now consolidating losses near the 1.0000 level. An immediate resistance on the upside is near 1.0010 and a connecting bearish trend line on the hourly chart. The first major resistance is near the 1.0020 level.

A break above the 1.0020 resistance level could start a decent upward move. In the stated case, it could even surpass 1.0050 on FXOpen.

Conversely, the pair might start another decline below 0.9980. The next key support is near 0.9955, below the pair could decline towards the 0.9920 level. Any more losses might send the pair towards the 0.9900 level.

GBPUSD corrected forcefully to the downside early on Friday, breaking below the critical 1.1400 pandemic low, where the bears halted the 2022 downtrend on September 7.

The MACD is extending its bearish wave below its red signal and zero lines in the four-hour chart, while the RSI and the stochastics are negatively charged near their oversold levels, suggesting a cautiously bearish bias.

The channel’s lower boundary is now a target at 1.1343. A continuation lower could pause near the 1.1200 psychological level before a more aggressive downfall takes place towards the 1.0890 number – this being the 261.8% Fibonacci extension of the latest bullish correction.

On the upside, a bounce above the nearby 1.1465 constraining zone could see the pair testing the 20- and 50-period simple moving averages (SMAs) within the 1.1530 – 1.1565 area. A break higher could pave the way towards the 1.1713 – 1.1760 resistance territory. If this gives way too, the door will open for the 200-period SMA at 1.1828.

Summarizing, GBPUSD is currently trading bearish at a make-or-break point. A decisive close below 1.1343 could confirm additional losses ahead. 

China’s data package released this morning exceeded expectations in countering the worsening market sentiment.

Official data showed a 5.4% y/y rise in retail sales in August compared to the expected 3.8%. The retail sector has benefitted from pent-up demand after a sluggish 2.7% MoM. Industrial production added 4.2% YoY against expectations of 3.8%.

These improvements are mainly attributable to the easing of coronavirus restrictions but may also be a reaction to the stimulus package implemented last month.

The recent economic acceleration may also be linked to the weaker renminbi, which has lost 4.7% against the dollar in less than a month. The USDCNH gained 11.5% from March local lows. In contrast to Europe, where a weak Euro is becoming a brake on the economy, the weaker renminbi may be warmly greeted by the authorities.

China’s consumer and producer prices growth is close to 2.5% y/y, compared with 9% CPI growth in the Eurozone and 8.3% in the USA. The weaker yuan supports Chinese exports’ competitiveness and slightly boosts domestic consumption but has not yet provoked excessive pressure on prices.

Yesterday the Chinese offshore yuan crossed the 7.0 per dollar line and is trading at 7.03 today. A significant psychological level in the past forced the authorities to step in to defend their currency in 2016 and 2018. In 2019 and 2020, the turning points have been higher, close to 7.15. It is well worth being prepared that we will not see any meaningful action or serious verbal interventions by the Chinese or US authorities up to these levels.

The British pound continues to lose ground after a brutal retail sales report. The pound dropped as low as 1.1350 earlier today, its lowest level since March 2020. GBP/USD is trading at 1.1373 in the European session, down 0.73%.

UK retail sales decline

The week wrapped up on a sour note in the UK, as retail sales for August were sharply lower. The headline reading declined by 5.4% YoY, lower than the July release of -3.2% and missing the forecast of -4.2%. It was a similar story with core retail sales, which declined by 5.0%, below the July reading of -3.1% and shy of the estimate of -3.4%. On a monthly basis, retail sales slid by 1.6%, missing the consensus of -0.7% and marking the sharpest decline in eight months.

The markets were braced for a weak retail sales report and the only surprise was how sharply consumer spending is falling. The cost-of-living crisis has hammered UK consumers who are in a sour mood and are cutting on disposable spending. Wage growth has not kept up with hot inflation and a YouGov survey found that consumer confidence fell into negative territory in August for the first time since the Covid lockdown in mid-2020. The weak data is another sign that the UK economy is tipping into a recession.

The Bank of England meets on September 22nd, a day after the Fed, and is expected to hike rates by 0.75%. The current rate of 1.75% is well below the Fed and other major banks, as the BoE has been slow to tighten, despite spiralling inflation. Governor Bailey has been criticized for throwing in the towel and not doing enough to combat inflation. The BoE is playing catch-up with inflation and could raise rates up to 4.5% next year if inflation does not ease significantly.

GBP/USD Technical

• GBP/USD is testing resistance at 1.1548. Next, there is resistance at 1.1689
• There is support at 1.1417 and 1.1306

Eurozone CPI was finalized at 9.1% yoy in August, up from 8.9% yoy in July. A year earlier, the rate was only 3.0% yoy. CPI core (all item ex-energy, food, alcohol and tobacco) was finalized at 4.3%, up from prior month's 4.0% yoy. The highest contribution to the annual Eurozone inflation rate came from energy (3.95%), followed by food, alcohol & tobacco (2.25%), services (1.62%) and non-energy industrial goods (1.33%).

EU CPI was finalized at 10.1%, up from 9.8% a month ago. The lowest annual rates were registered in France (6.6%), Malta (7.0%) and Finland (7.9%). The highest annual rates were recorded in Estonia (25.2%), Latvia (21.4%) and Lithuania (21.1%). Compared with July, annual inflation fell in twelve Member States and rose in fifteen.

Full release here.

USDCAD has been in an uptrend since early August when the price encountered strong support at the 200-day simple moving average (SMA). Moreover, in the past few sessions, the technical picture has improved even further, with the price recording a fresh 22-month high of 1.3270 and currently trading above its upper Bollinger band.

The momentum indicators also suggest that near-term risks are tilted to the upside. Specifically, the stochastic oscillator is sloping upwards in the overbought area, while the MACD histogram has been strengthening above both zero and its red signal line.

Should buying interest intensify further, the price could ascend to test the 1.3300 psychological mark. Conquering this barricade, the bulls could then target the September 2020 resistance territory of 1.3420. Even higher, any further advances may then halt at the June 2019 resistance of 1.3563.

On the flipside, bearish actions could encounter initial support at the previous peak of 1.3222. Sliding beneath that floor, the pair could challenge the 1.3074 barrier, which has acted both as resistance and support in the past few months. Failing to halt there, the 1.2960 support might prove to be the next obstacle for sellers to overcome.

Overall, USDCAD appears to have the necessary momentum to push even higher and form new multi-year highs. Nevertheless, a downside correction cannot be ruled out as the short-term oscillators are indicating that the pair is approaching overbought levels.

GBPJPY is retreating for the fourth consecutive red day, following the pullback from the 167.50 resistance level. Currently, the market is neutral in the medium-term, as it failed several times to post a higher high above the more-than-six-year peak of 168.65.

The pair is approaching the recent bullish crossover within the 20- and 50-day simple moving averages (SMAs) that is suggests more gains in the short-term. However, the technical oscillators show contradicting signals. The RSI is pointing downwards in the positive area, while the MACD is ready to fall beneath its trigger line above the zero level.

If the pair breaks the 163.90 support level as well as the short-term SMAs, then the next target could come from the 200-day SMA, which overlaps with the 160.00 psychological mark. More downside pressures may change the neutral outlook to bearish, meeting the 157.80 and the 155.55 support levels.

On the flipside, a bounce off the bullish cross of the SMAs may drive the market higher, towards the 167.50 resistance and the multi-year high of 168.65. Even higher, the market will endorse a long-term bullish bias, resting near the 175.00 handle, taken from inside swing low in April 2015.

In the broader picture, the market is awaiting a climb above the 168.65 barrier for brighten the bullish outlook. Only a decline beneath the 200-day SMA may switch the view to bearish.