The British pound jumped to a fresh post-Brexit vote high of 1.3945 against the US dollar. However, the pair wasn’t able to sustain gains above the 1.39 threshold and has retreated after the disappointing UK economic data.
According to the official figures from ONS, retail sales fell 1.5% month on month in December, which was a much stronger decline than analysts forecasted. Ironically, this was the biggest month-on-month fall since June 2016, when the referendum took place. Annual growth was 1.9% and marked the weakest figure since 2013.
While the overall picture remains bullish, and for many the pair still looks good to buy on dips, GBP longs are getting dangerous at this stage. The key drivers behind the pound’s rally are weak dollar and positive comments on Brexit progress. Therefore, as soon as demand for the greenback is back, the British currency may lose its allure and fall the victim of a major correction, while any sign of new challenges in Brexit negotiations will only add fuel to the fire.
Meanwhile, in the short-term, GBP/USD may still attract buyers, as the dollar still can’t shrug off the downside pressure. At least, this factor will limit further GBP’s potential weakening. Bulls should be cautious now, as a break below 1.3850 will open the way to the 1.38 area.