Sterling weakens from two-week high

The British pound slipped to $1.354 from a two-week high of $1.358 after weaker-than-expected UK PMI data reignited concerns about the health of the economy and increased speculation that the Bank of England (BoE) may move toward cutting interest rates later this year.

Both the services and composite PMIs fell short of market forecasts, pointing to a more pronounced slowdown in private sector activity, while the manufacturing index, though still contracting, showed a smaller decline than anticipated.

The data painted a mixed but overall downbeat picture, suggesting that momentum in the UK economy is faltering amid persistent uncertainty, waning consumer demand, and global headwinds.

Although there was a modest uptick in input price inflation—indicating some resilience in cost pressures—analysts largely expect the BoE to prioritize supporting growth rather than focusing solely on inflation. This view is reinforced by recent evidence of easing wage pressures and a looser labor market, which together reduce the risk of a wage-price spiral and give policymakers greater flexibility to stimulate the economy.

Markets are now pricing in a higher probability of at least one rate cut before the end of the year, with expectations hinging on upcoming economic data, particularly consumer-related indicators.

Traders are now looking ahead to the release of UK retail sales figures, which are expected to show a rebound driven by warmer weather and seasonal spending. A stronger-than-expected print could offer a temporary reprieve for the pound, but sentiment remains fragile given the broader macroeconomic backdrop.

Meanwhile, global risk appetite was buoyed by encouraging signals on trade negotiations between the United States and the European Union. Reports indicate that a potential agreement is coalescing around a 15% tariff rate, with EU officials pushing to include the auto sector in the deal.

While the compromise is seen as a positive development for transatlantic trade relations, uncertainty lingers after U.S. President Donald Trump reiterated that he would not accept tariffs below 15% and hinted that certain products could face levies as high as 50%. With the August 1 deadline approaching, markets remain on edge as negotiations continue, balancing cautious optimism with the potential for abrupt policy shifts.