GBP: Spending rebound amid falling prices

UK inflation is likely to move even further away from the BoE's 2% target in July, encouraging the central bank's recent dovish bias and the cautious GBP view of gradual outperformance against the EUR but material depreciation against the USD. 

UK consumer prices (Tuesday) are likely to fall 0.4% m/m in July (-0.1% y/y; consensus: -0.3% m/m and 0.0% y/y) after a flat reading in June with weaknesses likely to come from food, clothing and household goods. On Thursday, the retail sales are expected to recover somewhat in July after a surprise slowdown in June, growing 0.5% m/m (4.5% y/y; consensus: 0.4% m/m and 4.4% y/y), the same pace as in March. 

"We continue to think the BoE MPC is uncomfortable with recent sterling REER strength (GBP is almost 10% overvalued on a REER basis and with the Bank Rate close to the effective lower bound, a much weaker currency has likely become necessary for the Bank to achieve its inflation target)," notes Barclays.