Strong retail sales likely to limit downside risks to sterling

The pound has recovered from its post-referendum slump around 1.28 area against the dollar, however, bulls are struggling to break above 1.34 resistance area.

August retail sales report would be vital for the next move in the sterling. If the sales remain strong it would be a first indication that the regular people have largely ignored the outcome of the referendum, in terms of spending habit.

Why the pound is a major contender for upside?

• 50 percent of the 26 key releases since the referendum in June have proved to be good, while 35 percent were bad and rest 15 percent were what we say ugly and that means that the UK economy has been performing much better than expected.  The pound is due for a correction to the very least.

• The Bank of England (BoE) has eased policy last month and is likely to wait further before acting again, especially since economic performance was better than expected.

So the performance of the pound now stands on, how the economy performs, with lesser focus on inflation and how much strength dollar can pose. In the medium term, it would depend on the commentaries from Article 50 negotiations.

• To add to the good news for the sterling buyers, the dollar has been weak and analysis of latest commentaries suggests that the Fed would hold rates steady at the September meeting. So stronger retail sales might push pound pretty higher. Retail sales report for August is expected at 8:30 GMT. July saw 5.9 percent growth y/y and today it is expected a bit softer around 5.3 percent.

The pound is currently trading at 1.32 against the dollar. The key resistance lies at 1.34. We expect the pound to reach around 1.375 area in the near term.