At the end of last week, the exchange rate of the pound/dollar pair fell to the level of 1.3740. On Tuesday, the quotes reached a local minimum at the support of 1.3570, after which they rose by more than 150 points. The fall in demand for the US dollar was seen as a key factor that provided some support to the pair in the middle of the week.
The main volume of retail sales in the UK in June increased by 0.5% compared to the expected 0.4%. This, however, was offset by a slight disappointment due to a drop in sales of automotive motor fuel, which increased by a modest 0.3% for the reporting month, compared with the consensus forecast of growth of 0.6%. Separately, a report by IHS Markit, which was closely watched by participants, showed that business activity in the manufacturing sector and in the UK services sector slowed significantly in July. These data have increased concerns about the pace of economic recovery after the pandemic amid the resumption of morbidity in the UK. The risk-related impulse undermined the demand for a safe dollar and caused an active growth of the British currency.
Market participants suspect that British Prime Minister Boris Johnson hastened to completely remove restrictions in the national economy. A new wave of the pandemic is spreading around the world, affecting the UK as well. If it comes to a new quarantine, then the pound will be under strong pressure and will fall sharply against the dollar. First, the demand for protective assets will grow again against the background of negative forecasts. Secondly, the new restrictions will mean a repeated fall in the key economic indicators of the UK, primarily consumer demand.
The pound / dollar pair did not gain a foothold below the strong support level of 1.3670. From a technical point of view, the British currency can still hold in the current range, and then turn around to recent highs. The UOB Group believes that in the short term, the pound/dollar pair will trade in the range of 1.3600-1.3850. The current growth is already overbought, and there is hardly a serious chance of breaking the upper limit of the range. To consolidate the downtrend, quotes will need to gain a foothold below the level of 1.3670, and this opportunity will certainly present itself in the next 1-3 weeks against the background of falling demand for risky assets.
In the coming week, key economic indicators are not expected to be published in the UK again. Thus, the dynamics of the pair will again depend mainly on the price movements of the US currency. The publication of a comment on monetary policy following the Fed's meeting on Wednesday will help clarify the US regulator's plans to raise interest rates.
In our forecast for the coming week, we assume a decline in the exchange rate of the Pound/Dollar currency pair to the levels of 1.3720, 1.3700, 1.3670, 1.3650 and 1.3600.