Sterling Steady Amid Weak PMI Data

The pound held at $1.343 as investors processed S&P Global flash PMI data and Middle East developments. The survey showed the UK economy contracted in May amid rising political uncertainty and the growing impact of the Middle East conflict, with businesses citing falling output, surging inflation, supply shortages, and job cuts. The weak PMI followed earlier data showing April inflation came in below expectations and the jobs market unexpectedly softened, complicating the Bank of England's task as it is expected to raise interest rates at least twice this year. Meanwhile, Brent crude remained close to four-year highs after President Donald Trump said negotiations with Iran were in the "final stages" but threatened renewed military action if Tehran rejected his terms. In the UK, Chancellor Rachel Reeves was set to unveil cost-of-living measures, though a proposed cap on essential grocery prices was dropped after strong industry opposition, the Financial Times reported.

The pound traded just under $1.34 as investors assessed the impact of softer-than-expected UK inflation and its implications for the Bank of England’s policy path. Headline inflation fell to 2.8% in April, below the 3.0% forecast and the lowest since March 2025, after the UK energy regulator introduced a price cap on April 1. Both services and core inflation also undershot expectations, though fuel inflation surged to a 2022 high amid the conflict in Iran. This follows Tuesday’s jobs report, which signaled a labor market slowdown: the unemployment rate rose unexpectedly to 5% in Q1 2026, regular wage growth hit its weakest level since late 2020, and job vacancies dropped to their lowest since 2021. The cooler inflation data has led investors to further scale back their bets on BOE rate hikes, with markets now pricing in just two increases by December.

The pound slipped to $1.34, as investors processed disappointing UK jobs data and tracked developments in the Middle East conflict. Payrolls dropped by 100,000 in April, the sharpest fall since May 2020 and far exceeding forecasts of a 10,000 decline. The unemployment rate unexpectedly rose to 5% in Q1 2026, while regular wage growth slowed to 3.4%, its weakest pace since late 2020, and vacancies fell to the lowest level since 2021. As a result, traders now expect just two Bank of England rate hikes by December. Elsewhere, Brent crude stayed near a four-year high after US President Donald Trump delayed further strikes on Iran but warned of a possible "full, large-scale assault" if talks fail. In UK politics, leadership frontrunner Andy Burnham ruled out changing borrowing limits, easing fears of looser fiscal policy that had driven last week’s UK bond selloff. Meanwhile, PM Keir Starmer vowed to stay on even if Burnham wins the byelection, hinting at a leadership clash.