FX.co ★ UK economy maintains momentum with strong retail sales recovery

The pound responded with another upward move, reaching a new local high in the uptrend that has been ongoing since August 8. According to data, UK retail sales rebounded in July this year after summer discounts and the European Football Championship, which led to increased spending in department stores and sports shops.

The report indicated that the volume of goods sold in stores and online rose by 0.5% in July, following a revised decline of 0.9% the previous month. Economists had expected a 0.6% increase, but the June decline was less significant than the previously reported 1.2%. As for sales excluding fuel, they grew by 0.7%, which also exceeded economists' expectations of a 0.6% increase.

These figures suggest a stronger start to the third quarter after weak retail sales in June negatively impacted economic growth. It may also indicate growing consumer optimism. This follows the worst cost-of-living crisis in decades. Given the positive data, it can be concluded that the UK economy continues to move forward, with few signs that consumers are significantly cutting back on spending. Although yesterday's GDP report wasn't stellar, overall, things are looking fairly positive: inflation is slowing, the economy is growing, and retail sales are holding steady – all of which paves the way for further interest rate cuts by the Bank of England, which would further stimulate GDP growth.

Investors expect the Bank of England to cut interest rates at least once more this year after easing them on August 1 from their highest level in 16 years. Double-digit inflation, which peaked in 2022, combined with high borrowing costs, has significantly drained consumers' wallets, forcing people to pay more and buy fewer goods. Now, according to the latest report, the trend is improving. Rising real incomes amid falling inflation will help maintain sales at a high level.

It's worth noting that new Prime Minister Keir Starmer has made economic stimulus the centerpiece of his Labour Party's agenda following their election victory on July 4. The recovery in UK retail sales is likely to fit well with his new decisions regarding future economic stimulus. As I mentioned earlier, the pound responded with growth, but whether buyers will have the strength to hold onto these highs today remains a difficult question.

GBP/USD Technical Outlook

As for the current technical picture of GBP/USD, pound buyers need to retake the nearest resistance at 1.2885. Only this will allow targeting 1.2910, above which breaking through will be quite challenging. The most distant target is the 1.2940 level, after which we could talk about a sharper rally in the pound towards 1.2975. In case of a decline, the bears will try to regain control at 1.2860. If successful, breaking through this range will deal a serious blow to the bulls' positions and push GBP/USD down to a minimum of 1.2830 with the prospect of reaching 1.2800.

EUR/USD Technical Outlook

As for the current technical picture of EUR/USD, buyers now need to focus on reclaiming the 1.1020 level. Only this will allow targeting a test of 1.1050. From there, the pair could reach 1.1080, but doing so without support from major players will be quite challenging. The most distant target is the 1.1110 level. In case of a decline, I expect significant action from buyers only around the 1.0985 area. If there is no activity there, it would be wise to wait for a retest of the 1.0950 low or open long positions from the 1.0910 level.