Published: 27/05/2022 By ECAPSterling has recovered well following the sell-off on Tuesday induced by the dismal PMI figures for May. The collapse in the UK’s services PMI, which fell to just 51.8 this month from the 58.9 reading in March, has raised a few alarm bells. News that UK energy prices are set to increase by another £800 on average in October raised fresh concerns that rising inflation could weigh on UK consumer spending activity in the second half of the year. Investors have, however, reacted positively to the unveiling of the government’s more generous-than-expected support plan yesterday. The support package includes £15 billion in financial assistance, and a 25% windfall tax on oil and gas producer profits. While this only goes part of the way in alleviating the ongoing cost of living crisis, we are optimistic that the government’s targeted fiscal measures will ease at least some of the downside stemming from the recent boom in inflation. This appears to be supporting sterling, which looks likely to post its second consecutive week of gains against the dollar.
The greenback has lost ground against all of its counterparts in the G10 in the past week, amid a combination of a general improvement in risk appetite and a mild pull-back in market expectations for Federal Reserve interest rate hikes. Minutes from the most recent FOMC meeting in May, released on Wednesday evening, were slightly less hawkish than perhaps some of the market had anticipated. While the minutes noted that additional 50 basis point interest rate hikes would likely be needed at the bank’s June and July meetings, the communications opened the door to a slightly more gradual pace of tightening during the remainder of the year. Calls that the Fed could potentially hike in 75 basis point increments at upcoming meetings appear to have completely evaporated, which has also provided a bit of a headwind for the greenback.
The euro has rebounded above the 1.07 mark in the past few days, helped by hawkish comments earlier in the week from ECB President Lagarde, who opened the door to 25 basis point rate hikes at the bank’s July and September meetings. Data out of the Eurozone economy this week has been slightly underwhelming, notably the undershoot in the composite PMI for May (54.9 vs. 55.3 expected). The measure did, however, hold up better than those released in both the US (53.8 vs. 55.5), and the UK (51.8 vs. 56.5), and thats provided at latest some reason for optimism over the Euro Area growth outlook.