This morning’s key services PMI also missed its mark, with the index falling to 58.3 in April from 62.6 in March. While still comfortably in expansionary territory, it plays into the narrative that a slowdown in UK growth could be on the cards and, at the time of writing, sterling has responded by falling to around the 1.29 level on the US dollar, down 1% from where it began the day. Governor of the Bank of England Andrew Bailey will be speaking again this afternoon, but if his remarks on Thursday are anything to go by, an optimistic appraisal that provides any meaningful support for the pound appears unlikely.

Meanwhile, the US dollar has been broadly stronger against most of its peers in the past 24 hours or so, particularly following some hawkish comments from FOMC chair Powell at yesterday’s IMF panel. Powell said that it was ‘absolutely essential’ that the Fed brings down inflation, and that the bank was committed to raising rates ‘expeditiously’ in order to achieve its goals. In our view, this all but confirms that the Fed will hike rates by 50 basis points at its next policy meeting in less than two weeks time. Indeed, markets are now pricing in 250 basis points of interest rate hikes from the Fed during the remainder of the year, a repricing that has kept the dollar well supported against its major peers.

Amid the broadly stronger dollar, EUR/USD has continued to languishing around the 1.08 level this morning. Heightened expectations that the European Central Bank could raise interest rates as soon as its July Governing Council meeting briefly supported the euro on Thursday. The pair did, however, quickly give up its gains on some more non-committal remarks from ECB President Lagarde. Lagarde once again said that risks to Euro Area growth were skewed to the downside, and that the bank may need to lower its growth forecasts in light of these risks. We think that the ECB’s tone is overly cautious, particularly given economic data has held up rather well. This morning’s Euro Area composite PMI, for instance, once again beat expectations, rising to 55.8 from 54.9. So far, the economic fallout from the war in Ukraine appears minimal, and that should be triggering a more hawkish ECB, not an increasingly dovish one.

Figure 2: Euro Area PMIs (2019 – 2022)

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