UK growth momentum slows.

The Euro-Zone PMI manufacturing index dipped to a 36-month low of 44.6 for May from 45.8 and below consensus forecasts of 46.2. The services-sector index edged lower to 55.9 to a 2-month low of from 56.2, but slightly above market expectations. New business remained subdued and there was further divergence in inflation developments.

Manufacturing selling prices declined for the first time since September 2020, but there was a further sharp increase in services-sector selling prices and at a faster rate than April. Overall business optimism declined to a 5-month low.

The UK PMI manufacturing index declined to a 5-month low of 46.9 from 47.8 previously and below consensus forecasts of 48.0. The services-sector index also edged lower to a 2-month low of 55.1 from 55.9 and slightly below expectations of 55.5. New orders increased at a slower rate on the month while there was a marginal increase in employment.

Input prices increased at the slowest rate since March 2021 while charges also increased at the slowest rate since August 2021, although price increases were still historically high. Overall business optimism declined to a 3-month low.

The US manufacturing PMI index retreated to a 3-month low of 48.5 for May from 50.2 previously and below consensus forecasts of 50.0. The services-sector index, however, advanced to a 13-month high of 55.1 from 53.6 and above expectations of 52.6.

There was also divergence in orders with strong growth in services offset by a dip in manufacturing. There was a similar pattern in pricing with manufacturing input prices declining for the first time in three years while overall output prices increased at a slightly slower rate.

The dollar touched 2-month highs after the US data on Tuesday, but drifted lower on Wednesday as the yen and Euro managed to crawl higher.

The latest UK inflation data is due for release on Wednesday. Consensus forecasts are for a sharp decline in the headline rate to 8.2% from 10.1% due to the jump in prices last year which will come out of the calculation. The core rate is expected to remain at 6.2%.

The Reserve Bank of New Zealand (RBNZ) increased interest rates by 25 basis points to 5.50% which was in line with expectations, although there was a split vote.

There were, however, stronger indications that rates were at a peak which triggered sharp New Zealand dollar losses.

Minutes from May’s Federal Reserve policy meeting will be released on Wednesday.

Markets will be looking for the underlying assessment of the outlook and the extent of support for any move to pause rate hikes in June.

Bank of England Governor Bailey will be making further comments on the economy on Wednesday.

These will be particularly pertinent given the inflation data release earlier in the day.

The Euro was unable to gain support from the Euro-Zone data. Higher US yields underpinned the dollar. EUR/USD dipped to 1.0760 lows before attempting a limited recovery. EUR/USD traded around 1.0780 on Wednesday.

There was further yen selling on rallies on Tuesday with USD/JPY briefly hitting 6-month highs near 138.90. Stronger Tankan business confidence data helped underpin the yen on Wednesday with USD/JPY around 138.40.

The Swiss franc was held in tight ranges. EUR/CHF settled just above 0.9700 with USD/CHF just above 0.9000.

Sterling was underpinned by relatively hawkish Bank of England rhetoric. GBP/USD recovered from 1.2375 lows to trade above 1.2400,

The Australian dollar lost ground amid a stronger US currency, AUD/USD dipped to 0.6585 lows before a marginal recovery. The Canadian dollar was underpinned by higher oil prices USD/CAD settled close to 1.3500 from 1.3550 highs. The New Zealand dollar dipped sharply after the RBNZ rate decision. NZD/USD slumped to around 0.6170.

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