GBP/USD rebounds as UK retail sales beat forecasts – BBH

Pound Sterling (GBP) is clawing back losses after stronger-than-expected July retail sales, but upside remains limited. With services CPI stuck at 5.0% y/y and growth prospects muted, the Bank of England has little scope to ease aggressively, leaving GBP vulnerable to renewed weakness, particularly versus Euro (EUR), BBH FX analysts report.

Stronger July retail data offers GBP brief support

"GBP/USD continues to recover from Tuesday’s slump triggered by the brief sell-off in long term gilt. UK retail sales growth overshot expectations in July. Total retail sales volumes rose 0.6% m/m (consensus: 0.2%) vs. 0.3% in June (revised down from 0.9% due correction to the retail sales back data). Excluding auto fuel, retail sales volumes increased 0.5% m/m (consensus: 0.3%) vs. 0.6% in June driven by non-store retailers and clothing stores sales."

"Going forward, elevated household savings means spending activity will likely remain subdued. Unfortunately, the BOE has limited room to dial-up easing to support growth because UK services CPI inflation is stubbornly high at 5.0% y/y. Bottom line: elevated UK underlying inflation and a sluggish growth outlook spell trouble for GBP, especially versus EUR."