Sterling regains some lost ground vs the euro

The pound regained some lost ground against a weakening euro on Wednesday, a day after plummeting due to weak data and ahead of the expected release of a report into Downing Street lockdown-breaking parties.

Sue Gray, a senior civil servant, is expected to release the report on Wednesday, putting even more pressure on Prime Minister Boris Johnson as the country struggles with a slowing economy and decades-high inflation.

Data released on Tuesday showed a sharp slowdown in British business activity in May, with S&P Global’s flash Composite Purchasing Managers’ Index falling to a 15-month low, fueling fears that the economy will enter a slump.

Following Tuesday’s data, traders reduced their expectations for interest rate hikes from the Bank of England (BoE), with money markets now pricing in around 120 basis points of tightening by year’s end.

In an interview published on Wednesday, BoE Chief Economist Huw Pill stated that more tightening was needed but not necessarily a “super restrictive” stance. The pound was unchanged against the dollar, trading at $1.2532. Sterling was up 0.5 per cent against the euro at 85.17 pence, regaining some ground as the euro fell following comments from European Central Bank board member Fabio Panetta.

The US dollar halted a two-day losing run on Wednesday as Treasury yields paused recent losses, putting pressure on the euro and the New Zealand dollar, which had been boosted earlier by a hawkish central bank message.

The kiwi dollar rose as much as 0.8 per cent at one point, reaching a three-week high of $0.6514. However, as the US dollar gained strength, it surrendered much of its gains to trade slightly above the flatline. Ten-year Treasury rates in the United States fell 40 basis points after reaching three-and-a-half-year highs earlier in May.

The dollar has dropped approximately 3% after reaching two-decade highs earlier this month but has recovered 0.4 per cent from one-month lows touched earlier this week.