May 24, 2022 – Written by John Cameron
Pound (GBP) Slumps after Poor PMI Data Compounds Economic Fears
The Pound saw a sharp drop today as preliminary PMI data printed well below expectations. Both manufacturing and services data missed estimates with the former falling to 54.6 in May compared to an expected 55.1.
Even worse reading was the contraction of the services sector, with the index slumping to a 15-month low at 51.8 against an expected 55.8. The data aligns with the growing economic uncertainty and the Bank of England’s (BoE) pessimistic outlook, deterring investors from the Pound.
The latest readings reveal the weakest growth in the service sector since February 2021. The data also confirmed the underlying caveat of the positive retail sales from last Friday, with more people staying home and stocking up amid the bleak economic uncertainty. However, travel, leisure and events businesses are still enjoying strong growth conditions in the wake of lifting pandemic restrictions.
Chris Williamson, Chief Business Economist at S&P Global, remarks that inflationary pressures have risen to unprecedented levels and warns of the economy almost grinding to a halt. Commenting on the data, Williamson also notes:
“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.”
Euro (EUR) Draws Support from Hawkish ECB Comments
The Euro (EUR) is trending up against the Pound (GBP) after European Central Bank President Christine Lagarde made comments hinting at a probable hike rate in July. In a blog post on the ECB website, Lagarde also commented on the possibility that the central bank could raise interest rates further if saw inflation stabilising at 2%.
However, capping any further gains were the release of Euro area PMIs as they also printed below market expectations in May, albeit not as poorly as the UK releases.
The services index fell to 56.3 from 57.7 in April, missing estimates of 57.5. Despite the drop, this was still the services sector’s second-strongest expansion in the past eight months.
Manufacturing PMI data also missed expectations as it printed 54.4 in May against the 54.9 expected. Williamson also commented on the Euro data:
“The eurozone economy remained encouragingly resilient growth in May, as a beleaguered manufacturing sector was offset by a buoyant service sector.”
“Although factories continue to report widespread supply constraints and diminished demand for goods amid elevated price pressures, the economy is being boosted by pent-up demand for services as pandemic-related restrictions are wound down.”
GBP/EUR Exchange Rate Forecast: Partygate to Pile Pressure on the Pound?
Looking ahead, the Pound Euro (GBP/EUR) exchange rate could encounter more pressure and increased movement with the release of the Sue Grey report into lockdown-breaching gatherings at Downing Street.
Another photo emerged showing Boris Johnson drinking at a Downing Street party, casting fresh doubt over the Prime Minister’s numerous claims that he was unaware of any rule-breaking in No.10 during the pandemic.
Any further political turmoil could weigh on the Pound, with the ongoing Brexit concerns and Ukraine conflict only adding to the pressures.
Elsewhere, several speeches are planned this week from the ECB, including one from Lagarde later this evening. Any more hawkish comments could potentially bolster the Euro against the flagging Pound.
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TAGS: Pound Euro Forecasts