Sterling Edges Higher Toward 1.3650 Ahead of UK Retail Sales Data

Sterling/USD edged higher during Friday's Asian trading session, trading around 1.36447. The dollar came under pressure on reduced market expectations of Fed rate hikes, providing upward momentum for sterling. Following the unexpected decline in US July retail sales data, combined with moderate inflation and employment figures, market expectations for a Fed rate hike in September have fallen to around 30%.

**Weaker Dollar Provides Short-Term Support**

The dollar index has recently retreated below the 100 mark, mainly weighed down by weak US consumption and cooling rate hike expectations. Market data shows US July retail sales fell 0.6%, while both CPI and PPI indicate moderate inflation cooling, undermining the dollar's interest rate advantage. However, persistently high oil prices and Middle East geopolitical tensions have preserved some safe-haven demand for the dollar, limiting its decline. Analysts note that the dollar's policy rate advantage is diminishing, but energy and geopolitical factors are keeping its decline relatively restrained.

**UK Economic Resilience Supports Sterling**

Sterling's own fundamentals also provide support. The UK's second-quarter GDP grew 0.4% quarter-on-quarter, with June GDP up 0.3% month-on-month, indicating a degree of economic resilience. This resilience gives the Bank of England greater policy room to combat inflation without immediately pushing the economy toward recession. Market reports show sterling had previously risen to around 1.3561, near a three-month high, extending its rally since mid-July.

**Focus on Retail Sales Data to Test Consumption**

The day's focus now shifts to the upcoming UK retail sales data. This data will test whether the UK consumption side can maintain momentum amid rising household spending costs. The Bank of England has already projected fourth-quarter inflation to rise to around 3.2%, with Brent crude near $90 per barrel adding further upside inflation risks. If retail data proves strong, it could strengthen market expectations for further policy tightening by the Bank of England, thereby providing additional support for sterling.