Britain is celebrating Queen Elizabeth II's Platinum Jubilee this week. However, the economy is not all rosy. The UK was the first country to tackle high inflation by increasing interest rates. However, it is now experiencing stronger signs of a slowdown in economic growth. Yesterday, there were new reasons for concern. The PMI for May was released on Tuesday. The report showed that growth in the country's manufacturing sector slowed down compared to April. Last month, the figure fell from 55.8 to 54.6. Economists attribute the slowdown to disruptions in global supply chains caused by the military conflict in Ukraine and lockdown in China.
The slowdown in the manufacturing sector is also attributed to the current cost-of-living crisis, which has already led to a noticeable fall in domestic demand in the UK. Meanwhile, in the US, optimistic business activity data from the manufacturing sector was released for May. The ISM PMI rose to 56.1 in May from 55.4 in March, versus expectations for a small decline to 54.5. The rising figure boosted the chance of more aggressive inflation tactics by the US Federal Reserve, triggering a sharp jump in US 10-year government bond yields. On Wednesday, it climbed more than 9 bp to 2.939%. Amid hawkish sentiment, the US stock market closed Wednesday's trading with a decline. A sell-off in equities provided the dollar index with a boost in all directions. Meanwhile, risk aversion in favour of a defensive greenback has put a lot of pressure on GBP/USD. The pound collapsed sharply against the US dollar by 0.8% on Wednesday.
It fell from a high of 1.2616 to a 2-week low of 1.2458. This morning the British currency was also in the red zone and was trading below 1.25. Investor sentiment towards the pound sterling is becoming increasingly bearish on the British holiday. Traders now expect the GBP/USD pair to drop again, despite both the US and the UK focusing on further interest rate hikes.That is because a more resilient US economy should make it easier for the Fed to tighten its monetary policy. In the UK, in contrast, fears of a recession are rising. If the BOE takes more aggressive measures to combat inflation, it will lead to an even greater economic contraction. Furthermore, the pound's outlook is overshadowed by political uncertainty in the UK.
The most high-profile issue right now is a possible vote of no confidence. In recent days, Britons have been increasingly demanding the resignation of the country's Prime Minister Boris Johnson. Popular anger has been triggered by the double standards of the official, who has been partying in Downing Street during the coronavirus lockdown. According to some sources, a vote of no confidence in the Prime Minister could come as soon as next week. Also, Britain's looming trade war with the European Union remains a major concern. The UK authorities continue to threaten the EU with a suspension of the Northern Ireland protocol. Notably, this protocol is part of the Brexit agreement that was supposed to ensure smooth trade between the EU and Britain after it leaves the alliance. In fact, London is faced with inspections of British goods and other bureaucratic formalities in crossing the Irish Sea. This is unprofitable for the British economy, which is already on the brink of recession. If the UK unilaterally changes the terms of the protocol on Northern Ireland, as its government is increasingly saying, it will not only provoke a backlash from the EU, but also escalate the infighting in Ireland. All this could lead to an even greater collapse of the pound against the US dollar. GBP/USD is now 11% below its average for the last decade and 4% below its average after the 2016 referendum on UK membership of the European Union.
