Sterling dipped sharply after the much weaker than expected PMI data.

The US PMI manufacturing index retreated to a 3-month low of 57.5 for May from 59.2 and in line with expectations. There was, however, a steeper than expected decline in the services-sector index to a 4-month low of 53.5 from 55.6 and below consensus forecasts of 55.2. There was a net slowdown in new orders growth.

Input prices increased at the fastest rate on record while prices charged also increased strongly with output prices increasing at close to the highest rate on record, although overall business optimism held firm.

The Richmond Fed manufacturing survey dipped sharply into contraction while cost pressures increased which reinforced stagflation fears.

The Euro-zone PMI manufacturing index retreated to an 18-month low of 54.4 from 55.5 and slightly below expectations of 54.9 while the services-sector index was also below expectations at a 2-month low of 56.3 from 57.7.

Cost pressures eased slightly, although output prices increased at the second-fastest rate on record.

ECB President Lagarde stated that markets should not translate words into percentage point moves, but also commented that the bank is attentive to the level of the Euro. Council member Holzmann stated that a 50 basis-point hike would be appropriate in July, but fellow member Villeroy stated that this was not part of the consensus. There is a clear consensus that rates will be increased in July.

The Euro continued to make headway on Wednesday amid hawkish ECB rhetoric and EUR/USD hit 1-month highs just below 1.0750 before stalling as short covering on the Euro crosses eased. The dollar recovered slightly from 1-month lows earlier in the day.

The UK PMI manufacturing index dipped to a 16-month low of 54.6 for May from 55.8 the previous month and slightly below expectations of 54.6. Most attention focussed on the services sector with a sharp retreat to a 15-month low of 51.8 from 58.9 previously and well below consensus forecasts of 56.9.  There was a slowdown in orders growth with the sharpest slowdown with export sales under pressure. Cost pressures remained strong with input prices increasing at the fastest rate on record.

The rate of output prices slowed slightly amid weaker demand while overall business expectations dipped to 2-year lows.

The Reserve Bank of New Zealand increased interest rates to 2.00% from 1.50% at the latest policy meeting which was in line with expectations.

There was, however, a hawkish shift in guidance with the RBNZ now expecting that rates will be increased faster and further with a peak seen at 3.95% from 3.1% previously.

The New Zealand dollar strengthened and there are likely to be upward revisions to global expectations.

Euro-zone PMI data was mixed, but provided some evidence of resilience in the face of the Ukraine war and inflation expectations remained high. Further hawkish ECB rhetoric underpinned the Euro, although a July rate hike is priced in. Weaker US PMI data unsettled the dollar with risk conditions also important. The US 10-year yield dipped below the 2.80% level.

EUR/USD posted 1-month highs close to 1.0750 before fading to near 1.0700 on Wednesday. Lower yields sapped USD/JPY support with 1-month lows below 126.50 before a recovery to near 127.00.

The Swiss franc was underpinned by fragile risk conditions and expectations of a more hawkish National Bank stance. USD/CHF retreated to 4-week lows around 0.9575 before a recovery.

Sterling dipped sharply after the much weaker than expected PMI data. GBP/USD did find support below 1.2500 and traded above this level on Wednesday. GBP/EUR posted strong losses to near 1.1650 before a retreat to 1.1720 amid expectations of further imminent announcement of fiscal support.

Commodity currencies were dragged lower by the slide in equities before recovering on dips. Reserve Bank of Australia Assistant Governor Ellis stated that further rate hikes are on the way. AUD/USD consolidated just above 0.7100 on Wednesday. USD/CAD under-performed with a peak at 1.2875 before a retreat to 1.2830. NZD/USD surged to just above 0.6500 after the hawkish central bank rate hike.

Economic Calendar

07:00Germany GDP (Q/Q)0.20%
07:00Germany GDP (Y/Y)1.40%1.80%
07:00German GfK Consumer Confidence (JUN)-16-26.5
09:00CHF ZEW Expectations(MAY)-51.6
13:30USD Durable Goods Orders Ex Transportation(APR)0.60%1.40%
13:30USD Durable Goods Orders (M/M)(APR)1.00%0.80%

*All rates shown are indicative of interbank rates and should only be used for indication purposes only. It is important to note that foreign exchange rates fluctuate and that rates may vary depending on the amount and the base currency that is purchased or sold. Rates are correct as of 8:00am UK time. CentralFX are not responsible for the rates shown.