Sterling Flat as UK Business Activity Shrinks

The pound held at $1.343 as investors assessed S&P Global flash PMI data and Middle East developments. The survey revealed the UK economy contracted in May, ending a 12-month streak of growth, amid rising political uncertainty and the growing impact of the Middle East conflict. Businesses reported falling output, surging inflation, supply shortages, and job cuts. The weak PMI followed earlier data showing April inflation undershot 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. At the same time, Brent crude prices held near four-year highs amid concerns over a deadlock in Iran nuclear talks. In the UK, Chancellor Rachel Reeves announced a cost-of-living package, including the suspension of tariffs on over 100 supermarket foods and temporary VAT cuts on summer attractions.

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.