Sterling outperforms

The dollar was under more pressure yesterday after another softer than expected US inflation data release (this time producer output prices), which contributed to a further easing of Fed rate expectations – almost 20bps of hikes have been priced out by the market over the past couple of days – and a further decline in US bond yields. The euro rose to an intra-day high of circa $1.1485 against the US currency but is back at about $1.1465 this morning. Sterling outperformed on the day. It soared to highs of around $1.3560 against the dollar and about £0.8455 versus the euro during the course of the day’s session – with reports that UK PM-elect Andy Burnham will appoint Shabana Mahmood (seen to be “fiscally conservative”) as the next Chancellor providing some additional impetus to the pound – before easing back to its current levels of around $1.3540 and £0.8475. GDP data for May released in the UK a short while ago were marginally firmer than forecast but are having little impact on sterling.

Fed rate expectations eased further on the back of the weaker than forecast producer price inflation data with the market now pricing in around 38bps of hikes by June next year, about 17bps less than was the case at the start of the week. This contributed to a further fall in US bond yields, led by the short-end of the curve with 2-year yields down another 6bps or so to bring the cumulative decline since Monday’s close to almost 15bps. Elsewhere in bond markets, UK yields were also lower on the day, falling by 4-5bps across the curve, while German yields were flat to marginally higher.

The UK economy grew by 0.1% (month-on-month) in May according to this morning’s GDP release, having contracted by 0.1% in April, with an increase in services output (+0.3%) more than offsetting declines in output in industry (-0.5%) and construction (-0.8%). GDP over the two months April-May was up 0.4% on Q1, pointing to some moderation in growth from the 0.6% q-o-q pace in the first quarter of the year. On an annual basis, GDP in May was up 1.3% on May 2025.

Fed Governor Cook says “at this juncture, I see it as prudent to give a bit more time to observe how inflation unfolds from here”, but she warns that, “if we do not see signs of disinflation soon, I am prepared to act” by raising interest rates.

Looking to the day ahead, economic data scheduled for release include retail sales (June) and weekly jobless claims in the US and the trade balance (May) in the Euro area. There are a number of Fed members due to speak over the course of the day.