The pound fell after the release of disappointing UK preliminary Manufacturing and Services PMIs. The UK Manufacturing PMI dropped to 54.6 in May, while the Services PMI came at 51.8 in May. As a result, the pound to US dollar exchange rate dropped sharply.

PMIs

According to the S&P Global / CIPS PMI survey, growth in the UK private sector dropped to its weakest since the winter of 2021 lockdown, as the cost-of-living crisis hit customer demand in May. The seasonally adjusted S&P Global/CIPS UK Manufacturing Purchasing Managers’ Index (PMI) dropped to 54.6 in May versus 55.1 that was expected and 55.8 – April’s final reading. The preliminary UK Services Business Activity Index for May tumbled to 15-month lows, at 51.8 versus April’s final reading of 58.9 and 57.3 that was expected.

According to the survey, business expectations also fell to the lowest for two years in May due to the weakening global economic outlook and gloomy projections for consumer spending. The service sector showed the sharpest drop in business optimism.

Chris Williamson, Chief Business Economist at S&P Global, commented on the survey

“The UK PMI survey data signal a severe slowing in the rate of economic growth in May, with forward-looking indicators hinting that worse is to come. Meanwhile, the inflation picture has worsened as the rate of increase of companies' costs hit yet another all-time high. The survey data therefore point to the economy almost grinding to a halt as inflationary pressure rises to unprecedented levels.”

He said that rising prices, supply chain issues, labour shortages and increasingly gloomy prospects have added to rising concerns with companies reporting price resistance from customers. There are some signs that the rate of inflation could soon reach a peak, while a slowing in demand could help pull prices down in coming months. He highlighted that “the latest data indicate a heightened risk of the economy falling into recession as the Bank of England fights to control inflation. The survey data therefore point to the economy almost grinding to a halt as inflationary pressure rises to unprecedented levels.”

Inflation, recession, and Brexit concerns to influence the pound

JP Morgan analysts fear that the pound will remain “trapped in a stagflationary vortex” as inflation rises and growth slows down to "a borderline recession". Because double-digit inflation and zero growth are toxic to the pound, they said that they were cutting their GBP forecasts once again this month.

Their forecasts have also been cut as they believe that any potential deterioration in the trade relations between the EU and the UK as a result of possible changes to the Northern Ireland Protocol by the UK, will also add to a decline in the UK’s trade imbalances this year. They highlighted that the recent rallies by both the euro and the pound against the US dollar could be short-lived.

Economists at MUFG bank have also warned that legislation on the Brexit protocol will escalate in the coming weeks and any unilateral action by the UK could usher us into a new period of heightened uncertainty that will start to weigh on the pound.

 

 

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