Pound Sterling Sheds Weight Following PMI Undershoot

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The Pound shed some of the previous day's gains after a survey of the UK economy showed a slowing in activity during May.

The S&P Global Flash Services PMI fell to a six-month low at 52.9 (Apr: 55.0), undershooting expectations for a reading of 54.

The Manufacturing PMI provided a positive surprise, printing at a 22-month high at 51.3, which places the UK manufacturing sector in a better position than that of the German manufacturing powerhouse, where the manufacturing PMI stood at 45.4 in May.

Balancing the data to account for the services sector's dominance gives a composite PMI of 52.8, down from April's 54.1 and below expectations for 54.

To be sure, these data are fully consistent with a decent economic expansion, even if they undershot estimates. This undershoot explains the dip in the GBP/EUR conversion to 1.1736 from 1.1764 ahead of the release. The GBP/USD exchange rate dipped to 1.2725, having been at 1.2738 prior.

S&P Global said UK private sector activity registered a solid expansion in May as a resurgence in manufacturing production supplemented a further, albeit slower, upturn in services output.

Business activity growth was again accompanied by a rise in new order volumes and an uptick in export sales.

There is some relief for the Bank of England in the finding that UK businesses reported the softest increase in average selling prices for over three years in May, partly linked to a slowdown in input cost inflation after April’s steep rise.

The data comes just over 24 hours after the release of the UK inflation release for April that showed domestic inflationary pressures are picking up again, which pushed back the number of interest rate cuts expected by the market in 2024.

It was this repricing that boosted the Pound to multi-week highs against the Dollar and Euro.

These PMI data will dampen some of the Pound's recent upside impetus and potentially lock the key exchange rates well within their 2024 ranges.