Pound Softens as UK Sales Slip, US Services Sector Beats Expectations

The British pound edged lower against the dollar on Friday, trading near 1.36407. Weak UK retail sales data disappointed investors, while improved US services data provided support for the dollar, limiting the pound's upside.

**UK Retail Data Weighs on Sterling**

UK July retail sales data came in weak, becoming the main factor pressuring the pound during the session. Markets had already expected a month-on-month decline, but the actual weakness still dealt a blow to bullish sentiment on the pound. Combined with recent signs of a cooling labor market and easing inflation pressures in the UK, market expectations for further hawkish policy tightening by the Bank of England have notably faded. Analysts at Danske Bank noted that the combination of soft price action and labor market signals has undermined market bets on further rate hikes by the Bank of England for the remainder of the year.

**Improved US Services Sector Supports Dollar**

In contrast to UK data, US business activity improved in August, with the services sector particularly outperforming expectations. This data provided buying support for the dollar, causing the pound to lose some ground in intraday trading. However, with earlier US employment and inflation data both coming in soft, market expectations for a September Fed rate hike have dropped to around 36%, limiting the dollar's rebound momentum and leaving the pound on track for a weekly gain overall.

**Near-Term Moves Focus on Policy Expectation Gap**

Looking ahead, the near-term direction of GBP/USD will depend on further comparisons between UK and US economic data, as well as market repricing of the two central banks' policy paths. If UK data continues to weaken while the US economy shows resilience, the pound could face further pullback pressure. Conversely, if expectations for Fed rate hikes continue to cool, the pound could regain upward momentum.