GBP/USD strikes one-month low in post-PMI lull

Philip McHugh May 24th 2023 - 2 minute read

The pound traded in a wide range yesterday, with the currency initially retreating on disappointing UK data before recovering later in the session.

Meanwhile, Sterling is faring better so far this morning, with GBP/EUR flat at €1.1517 and GBP/USD stable at $1.2415. GBP/CAD is buoyed at CA$1.6803, while GBP/AUD climbs to AU$1.8882 and GBP/NZD soars to NZ$1.9791.

Looking ahead, will a jump in core UK inflation underpin the pound today?

What’s been happening?

The pound got off to a poor start on Tuesday, with the GBP/USD exchange rate even striking a new one-month low.

This initial slump in GBP came in the wake of the UK’s latest PMIs, which reported growth in the manufacturing and service sectors was weaker than expected this month.

Sterling then rebounded later in the session, supported by the International Monetary Fund’s upgraded UK growth forecast and Bank of England (BoE) interest rate expectations.

While the Eurozone’s PMIs outperformed the UK releases, any support they lent the euro proved to be short lived, with EUR exchange rates faltering in the latter half of the European session due to its negative correlation with the US dollar.

The strength of the US dollar was linked to ongoing concerns over US debt ceiling talks. Particularly after Republican House Speaker Kevin McCarthy said they were ‘nowhere near a deal yet.’

What’s coming up?

Kicking off today’s session was the publication of the UK’s consumer price index.

The Office for National Statistics (ONS) reported headline UK inflation fell from 10.1% to 8.7% last month.

However, core inflation unexpectedly spiked from 6.2% to 6.8%. Signs of persistent underlying inflation are likely to bolster BoE rate hike bets and could support Sterling through today’s session.

For EUR investors, the focus today will be on Germany’s latest IFO business climate index. Will a deterioration of sentiment in May break a six-month winning streak and pull the euro lower?

Closing out the session will be the publication of the minutes from the Federal Reserve’s May policy meeting.

If the minutes show that members of the Federal Open Market Committee (FOMC) are apprehensive regarding further interest rate hikes then the US dollar could fall.

Written by
Philip McHugh

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