Pound Rises as Weak US Retail Sales Pare Back Fed Hike Expectations

The British pound strengthened against the U.S. dollar on Monday, driven by an unexpected decline in U.S. retail sales that has tempered market expectations for a near-term Federal Reserve interest rate hike. The euro also posted gains as the dollar weakened across the board.

As of 3:57 AM ET, the GBP/USD currency pair was up 0.23% to 1.3564, while the EUR/USD pair climbed 0.32% to 1.1606.

Dollar Pressured by Economic Data

The catalyst for the dollar's decline was data released Friday showing U.S. retail sales fell by 0.6% in July from the previous month. This figure sharply missed market forecasts for a 0.1% gain and marked the largest single-month decline in over a year.

Following the report, market pricing for a Federal Reserve rate hike at its September meeting has been reduced to just 7 basis points, according to analysis cited by Investing.com. Expectations for cumulative rate increases next year have also narrowed to 35 basis points.

Analysts at ING noted that the U.S. Dollar Index (DXY) is testing the lower end of its recent range. "DXY is testing the 99.40 to 100.00 range floor and could stay soft this week as investors' attention turns to high-yield and pro-cyclical currencies," said Chris Turner, Global Head of Markets at ING.

Sterling's Gains Face Domestic Headwinds

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While the pound benefited from the dollar's weakness, analysts suggest its gains were not primarily driven by UK-specific fundamentals. ING maintains a mildly bearish outlook on sterling, citing the risk of disappointing domestic economic data this week.

Key UK releases include employment and wage data on Tuesday, followed by the July Consumer Price Index (CPI) on Wednesday. ING UK economist James Smith anticipates these figures will be "insufficient" to justify the 55 basis points of Bank of England rate hikes currently priced into the market.

Outlook and Key Events

Investors are now focused on Wednesday's release of the minutes from the Federal Open Market Committee's (FOMC) July meeting. Turner cautioned that given the cooling economic data since that meeting, the market would find it "hard to switch back to a fully hawkish mindset" even if the minutes reveal a more contentious debate over holding rates steady.

The euro is also drawing support from what ING described as diversification flows into Eurozone assets. Key data for the bloc this week includes current account figures on Wednesday and preliminary PMI readings on Friday. ING's baseline scenario sees the dollar remaining under pressure, with the main risks being a hawkish surprise from the FOMC minutes or a significant upside surprise in UK data.