Pound Gains as Weak US Retail Sales Data Dampens Fed Rate Hike Bets

The British pound strengthened against the U.S. dollar on Monday, a move driven by unexpectedly weak U.S. retail sales data that has prompted investors to reassess the likelihood of a Federal Reserve interest rate hike in September.

As of 03:57 ET (07:57 GMT), the GBP/USD currency pair rose 0.23% to 1.3564, according to Investing.com data. The euro also gained, with EUR/USD climbing 0.32% to 1.1606.

US Data Sparks Dollar Sell-Off

The dollar's broad weakness follows a report on Friday showing U.S. retail sales fell 0.6% month-on-month in July. This figure sharply missed consensus forecasts for a 0.1% rise and marked the steepest decline since May 2025, reversing a 0.2% gain from June.

The disappointing data has put immediate pressure on the dollar. "DXY is exploring the lower end of a 99.40-100.00 trading range and can probably trade to the soft side all week as investors focus on higher yielding and procyclical currencies," said Chris Turner, global head of markets at ING, in a note.

Fed Expectations Recalibrated

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In response to the soft economic signal, traders have significantly lowered their bets on Fed tightening. Money markets are now pricing in just 7 basis points of a rate increase at the September meeting. Furthermore, expectations for the total hiking cycle into next year have been scaled back from 50 basis points to 35 basis points.

Investors are now looking ahead to Wednesday's release of the minutes from the Federal Open Market Committee's (FOMC) July 29 meeting. However, analysts at ING cautioned that cooler activity data since that meeting would make it "hard for the market to switch back to a fully hawkish mindset."

Sterling's Strength Faces UK Test

Analysts noted that the pound's advance was primarily a result of dollar weakness rather than positive UK fundamentals. ING stated it maintains a "mildly negative bias on the pound," citing potential disappointment from key domestic data releases this week.

Upcoming UK economic reports include jobs and wage figures on Tuesday, followed by the July Consumer Price Index (CPI) on Wednesday. According to ING, this data may "not be strong enough" to justify the 55 basis points of Bank of England tightening still priced into money-market curves, posing a potential risk to sterling's recent gains.