GBP Support from Disinflation Limited by Spare Capacity

According to Elias Haddad of Brown Brothers Harriman (BBH), improving disinflation in the United Kingdom, coupled with solid Q2 Gross Domestic Product (GDP) growth, should support the British Pound (GBP) against the US Dollar (USD) and Euro (EUR). However, Haddad sees limited scope for a sustained rally.

The UK's disinflation trend is gaining traction, following the recent solid Q2 real GDP print. This would improve the growth-inflation mix and underpin the GBP vs. USD and EUR. Nevertheless, ample spare capacity in the UK economy leaves room for markets to trim Bank of England (BoE) rate hike bets, which currently stand at 60bps in the next twelve months.

Upcoming labour market data is expected to show wage growth slowing, with the unemployment rate dipping to 4.8% vs. 4.9% in May and private sector regular pay growth seen slowing to 2.8% y/y vs. 2.9% in May, matching the Bank of England's forecast.

The July Consumer Price Index (CPI) is expected to show underlying inflation easing, with headline CPI at 2.9% y/y (BoE projection: 2.8%) vs. 2.6% in June and core CPI seen at 2.5% y/y vs. 2.6% in June.

Finally, July retail sales are set for payback after two unusually strong months, with total retail sales volumes expected to fall -0.4% m/m vs. 1.0% in June.