UK disinflation and solid Q2 GDP support GBP but spare capacity fuels expectations of reduced BoE hikes, limiting upside.
The British Pound (GBP) faces limited scope for a sustained rally against the US Dollar (USD) and Euro (EUR) despite improving UK disinflation and a solid Q2 GDP print. Markets are trimming Bank of England (BoE) rate hike expectations, pricing in just 60bps of tightening over the next twelve months due to ample spare capacity in the economy.
Upcoming UK data releases, including June labor market figures, July Consumer Price Index (CPI), and July retail sales, are expected to align broadly with BoE projections. Wage growth is seen slowing to 2.8% year-over-year, while the unemployment rate may dip to 4.8%. Headline CPI is projected at 2.9% year-over-year, with core and services inflation easing slightly.
The mixed data outlook tempers expectations for a lasting GBP rally, as markets balance disinflation progress against the potential for reduced monetary policy support.