On Thursday, the British pound was able to trim some of its losses against the US dollar and the euro, after the PMI numbers turned out to be better than expected for the month of June. However, the currency was still vulnerable to fears of recession and political risks.
The Data’s Impact
In June, the preliminary composite index of the PMI was holding at 53.1, which was above the 52.6 median forecast, and had not changed since May. There was a 0.5% decline in the pound, as the US dollar strengthened, and it hit $1.2208. Earlier, the currency had moved below the $1.22 threshold.
There was a 0.1% increase in the sterling against the euro for the day, as it was trading at 85.98 per pence. Earlier, the currency had reached a low of one week. Analysts said that markets were likely comparing the PMI numbers of the UK with that of the eurozone, as the latter had fallen more than expected.
They said that this could ease some of the concerns of market participants about the UK’s economic outlook. It would also support the aggressive pricing of the Bank of England (BoE) and ultimately help the sterling move below 86.00. On June 16th, the Bank of England raised its interest rate by 25 basis points, which pushed it to 1.25%. It also added that it was prepared to be aggressive in order to counter the risks of inflation, even though there were concerns that increasing borrowing costs could inflict damage on the economy.
Investors were also keeping an eye out on any indications of political instability in the UK, as there were two key elections scheduled for Thursday. The Conservative Party was contesting in an election in the northern area of Wakefield and in the southwest in Honiton and Tiverton. If the party suffers a defeat in either of the locations, lawmakers might decide to oust Prime Minister Boris Johnson.
The behavior of the party officials is mostly negative for the pound and investor confidence. Meanwhile, some official data on Thursday also revealed that the British government had had to borrow more than expected in May. The borrowing was around 14 billion pounds, which is equal to $17.14 billion, primarily because of the increasing costs of debt interest brought on by surging inflation.
This week, Britain’s rail network has also suffered because of strikes due to conflict between the government, train operating companies and union heads. The demands are to increase the pay of the railway workers in order to keep up with the rising inflation. On Wednesday, data had shown that the consumer price index had climbed to a 9.1% high in the month of May. This is the highest inflation recorded in over 40 years and was primarily driven by soaring food prices.
Increasing wages could drive a wage price spiral, which would make it difficult for the central bank to control inflation in the long run, due to which there is resistance.