During Friday's Asian trading session, the British pound is consolidating in a narrow range near 1.3310 after six consecutive days of declines. Market attention is firmly focused on the upcoming UK retail sales data, which could provide fresh clues about the Bank of England's policy path. Amidst a mix of geopolitical headwinds and data variables, the downward pressure on the pound has yet to be alleviated.

The intensity of the Middle East conflict has escalated over the past two weeks. The US Central Command confirmed it has conducted airstrikes on targets inside Iran for the 13th consecutive night. On Thursday, Trump stated publicly that the US will hold Iran responsible for the actions of the Houthi militia and warned that Iran and its Houthi allies "will soon face major military punishment." This marks another escalation in threats from Trump following his earlier comment that "they haven't suffered enough."

For the British pound, the Middle East conflict transmits its impact through two channels:

First, rising geopolitical risk directly boosts demand for the US dollar as a safe haven. With two key energy chokepoints, the Strait of Hormuz and the Red Sea, simultaneously under threat, global capital continues to flow into dollar-denominated assets, systematically suppressing risk currencies like the pound. Trump's vow of "major military punishment" suggests there is little political basis for a short-term de-escalation of the conflict, meaning safe-haven buying of the dollar will persist.

Second, surging oil prices raise global inflation expectations, strengthening the rationale for the Federal Reserve to maintain higher interest rates. With Brent crude breaking through $100 per barrel, the CME FedWatch tool shows the probability of a July rate hike has risen to 35.8%, while the probability for a September hike stands at a high 82.1%. These rising rate hike expectations further widen the US-UK interest rate differential. The Bank of England's benchmark rate is 3.75%, while even if the Fed holds its current rate at 5.25%-5.50%, the spread disadvantage creates structural pressure on the pound.

Market expectations for the Bank of England's policy decision next week are highly consistent. Traders widely expect the BoE to keep its benchmark rate unchanged at 3.75% to further assess the economic impact of the Middle East conflict. Financial market pricing indicates the possibility of one or two 25-basis-point rate hikes before the end of 2026, an expectation largely unchanged from Tuesday.

Analysts at Scotiabank note that policy expectations remain firmly anchored ahead of next week's BoE decision. "The market expects no policy change at next month's MPC meeting, with the bank rate remaining at 3.75%," they said. They point out that this stable policy outlook continues to frame the short-term trading environment for GBP/USD, with investors awaiting upcoming UK data for further direction.

This policy backdrop has a dual impact on the pound. On one hand, the expectation that the BoE will hold steady means the pound lacks independent upward momentum from the interest rate side. On the other hand, the prospect of one or two rate hikes this year provides a "floor of support" for the currency. As long as the market does not believe the BoE will pivot to cutting rates, the downside for the pound remains relatively limited. However, with geopolitical risk persistently boosting safe-haven demand for the dollar, the effectiveness of this floor support is being tested.

UK retail sales data for June, due later on Friday, is the most important near-term variable for the pound. Market expectations point to a month-on-month decline of 0.3% in June retail sales, a sharp slowdown from the 1.2% growth seen in May. If the data meets or falls below expectations, it will reinforce the narrative of a cooling UK economy. This would apply fresh downward pressure on the pound, potentially pushing the GBP/USD pair below the 1.3300 level.

However, if retail sales data surprises to the upside (positive month-on-month growth or a smaller-than-expected decline), it would signal that consumer resilience remains intact, potentially reigniting expectations for further BoE rate hikes. As analysts have noted, a stronger-than-expected retail sales reading "could strengthen the case for the Bank of England to maintain an aggressive tightening stance," thereby providing support for the pound.

The importance of the retail sales data lies in its direct link to the BoE's policy reaction function. With inflation having fallen from its peak but still above target, the strength of consumption data will influence the central bank's trade-off between economic growth and inflation control. If consumption continues to weaken, the BoE will need to give more weight to downside economic risks when considering rate hikes. If consumption remains resilient, the central bank will have more justification to maintain its tightening stance.

The GBP/USD pair is trading in a narrow range near 1.3310 after a six-day losing streak. Whether this level can form a temporary bottom depends on multiple factors. According to the daily chart, the pair has broken below the 20-day moving average (MA20) of 1.3371, which has now turned from support into resistance. The medium and long-term moving averages (MA50, MA100, MA200) are highly clustered, indicating a prolonged period of range-bound trading with no clear directional advantage for either bulls or bears.

On the indicator front, the MACD is near the zero line, with the DIFF line crossing slightly below the DEA line, and the histogram has turned into a weak red bar. This suggests that the bullish momentum from the recent rebound is fading rapidly, with bearish forces briefly taking the upper hand. The RSI stands at 45.03, having fallen below the 50 neutral level, indicating a weak short-term bias with no clear signs of a bottoming or reversal process.

The pound's ability to rebound hinges on the interplay between retail sales data and geopolitical risk. The outlook for the GBP/USD pair depends on two major variables. Factors supporting the pound include a potential upside surprise in retail sales data, which would strengthen the BoE's case for maintaining a tight policy stance, potentially pushing the pair above 1.3350 and towards 1.3400. Additionally, the technical oversold condition after five consecutive days of losses provides favourable conditions for a rebound. Factors weighing on the pound include the escalating Middle East conflict (13 consecutive nights of airstrikes and Trump's vow of "major military punishment"), which continues to boost safe-haven demand for the dollar. The expectation that the BoE will hold rates steady means the pound lacks independent interest rate support. If retail sales data falls short of expectations, the pound could break below 1.3300 and accelerate its decline.

In the near term, the 1.3300-1.3350 range represents a critical decision zone for the pound. A break above 1.3350 would open the way towards 1.3400, while a break below 1.3300 would target 1.3250. The direction of the move will be determined by the marginal changes in two key variables: the retail sales data and the geopolitical risk from the Middle East. For traders, Friday's retail sales data acts as a short-term catalyst, while the Middle East situation sets the backdrop for the medium-term trend. The direction of the next phase for the pound will be determined by how these two forces align.