Pound Rises as Weak US Retail Data Weighs on Dollar Outlook

Sterling strengthened against the US dollar at the start of the week, as softer-than-expected US retail sales data prompted investors to scale back expectations for a Federal Reserve interest rate increase in September. The euro also gained ground, reflecting a broader weakening of the dollar as markets reassessed the likelihood of further US monetary tightening in the near term.

By 03:57 ET (07:57 GMT) on Monday, the pound-to-dollar rate (GBP/USD) had climbed to 1.3564, marking a 0.23% increase for the session. The euro-to-dollar rate (EUR/USD) rose to 1.1606, up 0.32%. The shift followed Friday's release of US retail sales figures for July, which showed a 0.6% month-on-month decline-well below consensus forecasts for a 0.1% rise and reversing a 0.2% gain in June. This was the sharpest monthly drop since May 2025, raising questions about the resilience of US consumer demand and the Federal Reserve's next steps.

Dollar Weakness Drives Sterling Gains

The dollar index (DXY) moved toward the lower end of its recent trading range, as investors favored higher-yielding and more cyclical currencies. Market pricing now reflects only 7 basis points of additional Fed tightening expected at the September policy meeting, with the cumulative forecast for rate hikes into next year reduced to 35 basis points. The main US event this week is the release of minutes from the July 29 Federal Open Market Committee (FOMC) meeting, when policymakers voted 9-3 to keep rates unchanged. Since then, a series of softer US activity indicators has made it less likely that the market will quickly return to a fully hawkish stance, even if the FOMC minutes suggest a closer debate than previously thought.

Sterling's recent appreciation has been driven primarily by dollar softness rather than domestic UK factors. Analysts at ING maintain a mildly negative outlook for the pound, citing the risk of disappointment in upcoming UK data releases. Key figures on UK employment and wages are due Tuesday, followed by July inflation data on Wednesday. ING's UK economist James Smith expects these reports will fall short of justifying the 55 basis points of Bank of England tightening still implied by money-market pricing. Seasonal adjustment quirks may also make second-half UK economic data appear weaker than underlying trends suggest.

Euro Outperforms as Diversification Flows Rise

The euro has outperformed both the pound and the dollar, supported by what ING describes as growing international demand for eurozone assets. This trend is seen as a diversification move against the backdrop of the US equity market's AI-driven rally, with estimated flows into eurozone assets running at around €1 trillion on a rolling 12-month basis. EUR/USD is currently testing intraday resistance at 1.1585, with 1.1650 identified as a possible target in quieter trading conditions. The eurozone's current account data, due Wednesday, and Friday's flash Purchasing Managers' Index (PMI) releases are expected to be the main regional catalysts for further currency movement.

For sterling, any disappointment in UK wage or inflation data could open the door for the euro to recover against the pound, with EUR/GBP potentially moving toward the 0.8575-0.8585 range. ING's base case is for the dollar to remain on the defensive this week, unless the FOMC minutes or UK data deliver a material upside surprise. This cautious stance echoes themes discussed in recent coverage, such as the analysis of how softer US economic data and shifting Fed expectations have shaped the pound's performance against the dollar in recent market developments.

Key Data and Market Implications

According to the latest available figures, GBP/USD rose to 1.3564 and EUR/USD to 1.1606 as of early Monday trading, reflecting gains of 0.23% and 0.32% respectively. US retail sales for July fell by 0.6% month-on-month, the largest drop since May 2025, compared to expectations for a 0.1% increase. Market-implied odds for a September Fed rate hike have dropped to just 7 basis points, with cumulative tightening expectations for the coming year now at 35 basis points. The next major scheduled event is the publication of the July FOMC meeting minutes on Wednesday, which could influence market sentiment if they reveal a closer policy debate than previously assumed.

While the pound's recent gains have been driven by external factors, the outlook remains sensitive to both UK and US data releases. Any significant deviation from expectations in UK wage or inflation figures could shift market pricing for Bank of England policy, while a more hawkish tone in the FOMC minutes could revive support for the dollar. For the euro, continued diversification flows and upcoming eurozone data will be key to sustaining its recent outperformance.

Central banks play a pivotal role in shaping currency values through their policy decisions and communication. The Federal Reserve's approach to interest rates, especially in response to changing economic data, directly affects the dollar's strength against other major currencies. Similarly, the Bank of England and the European Central Bank influence the pound and the euro through their own policy signals and economic assessments. Market expectations for future rate moves are constantly updated as new data emerges, making central-bank minutes and official statements closely watched events for anyone tracking exchange rates or planning international payments.