Sterling weakened against the US dollar on Thursday following a string of eurozone business surveys that pointed to a contraction in activity for the first time in 16 months, intensifying inflation worries and denting risk sentiment across markets.
GBP/USD was down 0.13% at 1.3491 as of 08:48 ET (12:48 GMT), pulling back from Wednesday's peak of 1.3537. EUR/USD eased 0.12% to 1.1692 during the same window.
The S&P Global flash eurozone composite PMI plunged to 48.6 in April from 50.7 in March - its weakest reading in 17 months and well under the 50.1 consensus. Services activity in the bloc fell sharply to 47.4, a rate of decline not observed since the pandemic lockdowns of early 2021. The survey results point to a quarterly GDP contraction of about 0.1% in the euro area.
By contrast, headline UK survey data looked stronger. The UK composite PMI rose to 52.0 from 50.3, beating forecasts of 49.8 and marking a two-month high. Manufacturing showed a particularly strong performance, climbing to a 47-month high of 53.6.
Despite the upbeat headline in the UK readings, S&P Global's chief business economist Chris Williamson warned much of the improvement could be illusory - driven by businesses advancing purchases to avoid anticipated price rises rather than reflecting true end-user demand.
More concerning for central banks was the acceleration in input costs on both sides of the Channel. UK service-sector input cost inflation posted its largest single-month increase since the survey began nearly three decades ago. Eurozone input costs rose at the fastest clip since late 2022. Respondents to both surveys pointed to higher fuel costs associated with the ongoing crisis in the Strait of Hormuz as the main contributor to rising input prices.
The data presents a similar dilemma for the Bank of England and the European Central Bank - whether to further tighten policy to bring down inflation or pause to shield fragile growth. Market expectations do not foresee either central bank moving at their meetings scheduled for next week.
At the same time, a broader bid for the US dollar intensified the pressure on the pound and euro. US equity futures turned lower overnight, prompting a risk-off shift that ING strategist Francesco Pesole described as the clearest dollar-positive dynamic in the present market environment. In that scenario, elevated oil prices driven by Strait of Hormuz tensions can support commodity-linked currencies while also bolstering the greenback when equity markets weaken.
EUR/GBP recovered slightly after falling as low as 0.867 on Wednesday. ING said it maintained a preference for further gains in the cross, pointing to narrowing interest-rate differentials and heightened political risk ahead of Britain's May 7 local elections, where Prime Minister Keir Starmer's Labour party is widely expected to underperform.
Key points
- Eurozone flash composite PMI dropped to 48.6 in April, signalling a contraction and pointing to a potential 0.1% quarterly GDP decline.
- UK composite PMI improved to 52.0, with manufacturing at a 47-month high of 53.6, though some of the strength may reflect front-loaded purchasing rather than robust demand.
- Input-cost inflation accelerated sharply in the UK and rose rapidly in the eurozone, with fuel costs linked to the Strait of Hormuz crisis cited as a key driver.
Risks and uncertainties
- Persistently higher fuel prices tied to Strait of Hormuz tensions could keep input costs elevated, pressuring margins in services and manufacturing sectors.
- Weakening eurozone activity increases the risk of further GDP contraction, weighing on trade-exposed sectors and financial markets in the region.
- Political risk in the UK ahead of local elections - together with narrowing rate differentials - could push EUR/GBP higher, adding volatility to currency markets.