The British Pound is facing increased downside risks following a significant slump in the UK's May PMI data, according to Brown Brothers Harriman’s (BBH) Elias Haddad [1]. GBP/USD is currently consolidating near 1.3440, but analysts warn that a likely downward repricing of the UK swaps curve and the potential for a further leftward policy pivot by a Labour government could further undermine the currency [1].
The UK May composite PMI unexpectedly dropped by 4.1 percentage points to a 13-month low of 48.5, falling below the 50 boom/bust threshold and missing the consensus estimate of 51.6 [1]. This decline was driven entirely by the services sector, with the services PMI falling 4.8 percentage points to 47.9 (consensus: 51.7), marking its lowest level since January 2021 [1]. In contrast, the manufacturing PMI remained unchanged at 53.7, slightly above the consensus of 53.0 [1].
Market expectations for Bank of England (BOE) rate hikes have been trimmed, with the swaps curve now pricing in 57 basis points of hikes over the next twelve months, down from 75 basis points previously [1]. However, BBH notes that this is still considered too aggressive, given the BOE's estimate of a negative output gap between -1.5% and -1.7% of potential GDP in 2026 [1].
The combination of weaker-than-expected economic data and ongoing policy uncertainty is reinforcing downside risks for Sterling, with analysts highlighting the vulnerability of the currency to further negative developments [1].
CONCLUSION
The sharp decline in UK May PMI data and a downward adjustment in BOE rate hike expectations have heightened downside risks for the British Pound. With policy uncertainty and weak economic indicators, Sterling remains vulnerable to further losses in the near term.