Sterling weaker following poor economic data – will the pound drop further?

Sterling weaker following poor economic data – will the pound drop further?

Sterling opened yesterdays session at a weekly low against the single currency. The pairing increased throughout the day but is trading more than a cent lower than the monthly high reached last week, following strong UK inflation data.

PMI data released on Tuesday morning is the catalyst for the latest move. PMI data (Purchasing Managers’ Index) measures the performance of the manufacturing and services industries. The index provides insight into the current and future business conditions. A reading above 50 signals an expansion where a reading below 50 signals contraction.

The combined PMI reading for the eurozone was 50.2, higher than last month’s reading of 49.3 and signaling an expansion for the EU industries and giving a boost to the value of the euro. The UK’s combined reading was 47.8, lower than last month’s reading, signaling a contraction. This will come as a concern for the Bank of England who have forecast the UK to fall into recession in 2023.

Inflation remains a problem in the EU and UK. The PMI numbers suggest the economic recovery has begun in the Eurozone which gives the ECB bargaining power to continue raising interest rates. Another hawkish 50-basis point hike from the ECB would provide support for the euro against the pound and the dollar. EURUSD is trading at 9-month highs and EURGBP is trading close to 4-month highs.

Weak PMI data poses a problem for the BoE as they continue to combat inflation which sits at a 40-year high. Further interest rate hikes could cause the economy to cool down at a faster pace than expected and plunge the UK into a deeper recession. Some commentators are tipping the Bank to reduce the next rate hike to 25-basis points. A reduced or dovish-hike from the BoE could put further downward pressure on the pound.

There is little to no data of consequence coming from the UK or Eurozone today so all eyes will be on the US. Durable goods orders, jobs data, and GDP data is released today. Any data that deviates from expectations could provide significant volatility for the dollar against its major counterparts.

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