Sterling slides after soft PMI data sent a UK recession warning

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LONDON – The British pound fell to its lowest level in a week against the euro as data added to concerns that the UK could plunge into a recession later this year after showing a sharp decline in business activity.

S&P Global’s Flash Composite Purchasing Managers Index (PMI), a monthly measurement services and manufacturing industry, fell to 57.8 in April from 51.6 in May, its lowest level since February last year.

The initial reading was worse than all the forecasts in the Reuters economists’ survey, which pointed to a drop to 57.0.

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“This sudden decline in growth prospects will be a major concern for the Bank of England and will certainly call for further rate hikes,” said Richard Perry, financial market analyst at Infinix.

“This reinforces our expectation that one or at most, two 25bps increases will be possible before the BoE’s tough stance is reassessed.”

The money market is currently fully priced at 25 basis points at the BoE’s June policy meeting and has risen 114 basis points by the end of the year, down from around 125 basis points after strong retail sales data on Friday.

At 1420 GMT, the pound was down 1.0% against the euro at 85.80 pence, after touching its weakest level against the single currency since May 12.

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The dollar fell 0.6% to 25 1.2522 after falling 0.8% below $ 1.2500 before Sterling.

In the bond market, the yield of the British gilt has fallen sharply as investors have re-evaluated the rate outlook following the data.

Rate-sensitive two-year government bond yields fell more than 15 basis points to 1.418%, the sharpest fall since March 1. The 10-year yield fell 11.5 basis points to 1.856%.

The head of the European Central Bank, Christine Lagarde, said on Tuesday that she had seen the ECB’s deposit rate zero or “slightly above” by the end of September, after the pound had already fallen against the euro after indicating an increase of at least 50 basis points from current levels.

“The bounce on the EUR / GBP is responsible for the broader progress in the euro over the last two days following comments from the ECB about the near-term prospect of a rate hike from Lagarde,” said Jans Naervig Pedersen, chief analyst at Danske Bank.

“We can see the EUR / GBP rising around 0.86 in the short term, as relative monetary policy will continue for the euro,” Pedersen added.

Meanwhile, British public lending fell to 144.6 billion pounds ($ 180.88 billion) or 6.1% of GDP in 2021/22 fiscal year, figures from the UK’s Office for National Statistics showed on Tuesday, falling more than 7 7 billion from the initial ONS estimate. Last month. (1 = 7 0.7994)

(Reporting by Samuel Indic; Editing by Kirsten Donovan, John Boyle and Susan Fenton)

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