GBP/USD buoyed by strong UK economic data
The British pound has shown notable strength this year, supported by a steady stream of better-than-expected UK economic indicators. This momentum has pushed the GBP/USD pair up by more than 8% year-to-date, closely mirroring the gap between economic surprises in the UK and the US. The relationship between these two surprise indices has reached near-decade highs over the past six months, driven largely by solid UK performance rather than weakness in the US.
The broader trend of de-dollarisation is influenced by the US’s mounting debt, inconsistent policy environment, and softer economic growth, which has weighed on the dollar. Nevertheless, the strong link to UK data suggests the pound could maintain its upward trajectory as long as UK fundamentals stay robust. However, should UK data falter or the US economy rebound sharply, the pound’s advance may slow, with resistance near $1.36 likely to be significant.
Looking at May’s UK Purchasing Managers’ Index figures, the composite PMI was revised upward to 50.3, improving from a preliminary 50.0 and April’s 48.5. This indicates a modest return to growth, albeit one of the weakest since October 2023. The improvement was mainly driven by increased activity in the services sector, which helped offset ongoing declines in manufacturing.
The services PMI climbed to 50.9, suggesting a tentative recovery amid reduced concerns over US tariffs. However, demand remains soft, with new orders falling for the fourth time in five months. Employment in services has declined for eight consecutive months, though the most recent decrease was the smallest since late 2024. Price pressures remain, but business confidence has improved, buoyed by planned investments and a more optimistic economic outlook.
US economic indicators signal slowing growth, pressuring the dollar
Recent data from the United States points to a cooling economy, contributing to a weaker dollar as markets grow cautious about the risk of a downturn later this year. The ADP report for May revealed private sector job gains of only 37,000, the smallest since March 2023, suggesting labour market momentum is softening.
The ISM services index also disappointed, falling to 49.9 against an expected 52.0, with new orders dropping sharply to 46.4 from 52.3 in April. Both business activity and new orders have now hit levels not seen since the early months of the pandemic in 2020. Meanwhile, inflationary pressures remain elevated, as the prices paid index climbed to 68.7, matching levels last observed during the post-pandemic supply chain bottlenecks.
These signals have influenced US Treasury yields, with the 10-year yield dropping below 4.4% and the 30-year yield falling beneath 5%. Volatility in equity markets, as measured by the VIX, has eased below its decade average of 18.5, reflecting a calmer environment. Overall, the US dollar is adjusting to the prospect of slower growth, contributing to softer pricing in currency markets.
On trade, discussions are ongoing regarding the upcoming expiration of a 90-day tariff truce. While a lower court initially blocked some tariffs, this decision was overturned on appeal, keeping them in place. The evolving trade environment remains a source of uncertainty for markets.
Attention now turns to the Non-Farm Payrolls report expected tomorrow, with forecasts for 126,000 jobs added in May and unemployment steady at 4.2%. A result below expectations could weigh heavily on the dollar and potentially push the DXY index to revisit its 2025 lows near 97.9.
Euro maintains ground above $1.14 amid cautious sentiment
The euro has managed to hold above the $1.14 mark, supported in part by weaker US economic data. This strength has helped EUR/USD stay above its 21-day moving average, though market participants remain wary of stronger US employment figures expected later this week, which could exert downward pressure.
Despite the softer US data, ongoing trade negotiations between the US, China, and the EU continue to limit the euro’s upside potential. Any US dollar recovery tends to undermine confidence in the euro’s prospects as a future global reserve currency, a notion that had gained some traction recently.
Political and economic tensions are mounting as key deadlines approach. EU officials remain cautious amid trade negotiations and geopolitical uncertainties such as the war in Ukraine. The forthcoming G7 summit in Canada and trade talks scheduled in Brussels are highly anticipated for the guidance they might offer on avoiding severe tariffs on European goods.
Volatility in the EUR/USD pair has remained muted compared to previous European Central Bank meeting days. The ECB is widely expected to reduce its deposit rate to 2.00% in its upcoming decision, with markets pricing in almost full certainty of the cut. This expectation is underpinned by recent inflation data showing headline inflation falling below the ECB’s 2% target to 1.92%, and core inflation easing to 2.3%, signalling a weakening economic outlook for the Eurozone.
