06:00 AM EDT, 08/16/2024 (MT Newswires) -- It's been in general a good week of economic data from the United Kingdom and that continued Friday with the retail sales data for July revealing a slightly stronger-than-expected reading when the upward revision to the June data is incorporated, said MUFG.

The excluding auto fuel gain in sales of 0.7% m/m was 0.1ppt more than expected and there was a 0.2ppt upward revision to -1.3% to the June reading. Bad weather impacted the June reading but better weather in July along with sporting events and discounting helped boost the overall volume of sales, wrote the bank in a note to clients.

The data followed a solid Q2 gross domestic product (GDP) growth reading of 0.6% q/q after a 0.7% gain in Q1 -- the best run of growth over two quarters since the two quarters to Q1 2022 before the inflation shock undermined economic activity, stated MUFG.

Keeping inflation in check will as such be the best avenue to more sustained economic growth going forward and certainly highlights the potential risk of the Bank of England (BoE) failing to meet the expectations of market pricing on rate cuts. The bank expects the BoE to cut the key policy rate once more this year -- at the November meeting when markets get the next updated Monetary Policy Report (MPR).

Markets are currently priced for more than that -- over 40bps and MUFG is correct it sees potential for this to adjust which should help provide support for sterling (GBP).

This week BoE Monetary Policy Committee (MPC) member Catherine Mann spoke of an "upward ratchet" to the wage-setting process that could be structural. Admittedly, Catherine Mann is a known hawk but her comment will have gained credibility after the government agreed to recent large wage deals in the public sector for doctors and this week for train drivers, pointed out the bank.

Wage growth did slow in the jobs data this week so this confirms the disinflation process and the scope for rate cuts but the BoE is more likely to fall short of market expectations in circumstances of economic growth picking up and wage growth risks remaining elevated.

After long GBP positioning amongst Leveraged Funds hit the highest level since 2014 a few weeks ago, the risk-off period saw some positioning paring that has resulted in GBP being the worst-performing G10 currency so far in August, added MUFG.

However, it's the best performing this week as risk appetite diminishes and the bank sees scope for that outperformance to persist.