Pound eases on strong dollar, signs of inflation pressures
The currency firmed against the euro, which slipped 0.14% to 86.59 pence
The pound eased against the dollar on Thursday, largely as a result of the U.S. currency drawing in safe-haven flows, as investors remained nervous over a fragile ceasefire in the Middle East, but also on the back of more evidence of the pain coming for the UK economy from rising energy costs.
A survey of UK business activity showed companies reported a record jump in costs in April, while a separate survey of confidence in the manufacturing sector showed deep pessimism and the steepest rise in costs since records began for that report in 1975.
Money markets also shifted to show traders now see a 75% chance of a rate hike from the Bank of England by June, compared with a 50/50 chance at the start of the week.
Pound, which has returned to where it was in late February, was a touch lower on the day at $1.349, set for a 0.17% decline for the week. It firmed against the euro, which slipped 0.14% to 86.59 pence .
The share of British companies reporting rising costs surged by a record amount this month, a clear warning of higher inflation ahead as fallout from the Iran war spreads through the economy, a survey showed on Thursday.
Data company S&P Global said its gauge of input prices in this month’s Flash UK Composite Purchasing Managers’ Index showed the biggest rise on the month since records began 28 years ago, hitting its highest level since a double-digit inflation in late 2022.
A separate report from the Confederation of British Industry on Thursday showed domestic manufacturers have turned their most pessimistic since the start of the COVID-19 pandemic. The survey’s gauge of expected prices climbed to +32 from +12 in March, representing the biggest month-to-month rise since records began in 1975.
To be sure, the outlook remains murky. While we remain sanguine about the prospect of second-round effects, indirect effects remain worrying. Higher energy prices aren’t the only thing consumers will have to worry about. Food prices are likely to rise. Higher shipping costs could also push up core goods prices, Deutsche Bank UK economist Sanjay Raja said.
Raja added that, for now, this would do little to push the BoE into any decisions on rate rises.