GBP/USD is consolidating near 1.3440. Risks to Sterling are linked to possible repricing in the UK swaps curve and the chance of a further leftward shift in Labour government policy.
UK May PMI data indicate a fall in private sector activity. The composite PMI dropped 4.1ppt to 48.5, a 13-month low and below 50, versus a 51.6 forecast.
Uk Activity Data Signals Downturn
The services PMI fell 4.8ppt to 47.9 versus 51.7 expected, the lowest since January 2021. The manufacturing PMI was unchanged at 53.7 versus 53.0 expected.
Markets reduced implied Bank of England tightening over the next 12 months to 57bps from 75bps. The BOE estimates a negative output gap of between -1.5% and -1.7% of potential GDP in 2026.
The British Pound is looking weak while consolidating near the 1.3440 level against the dollar. Last week’s surprise contraction in the May services PMI, which fell to 47.9, confirms the economic slowdown we have been anticipating. This drop has created significant downside risk for Sterling in the near term.
This weak business activity data follows the latest inflation report for April, which showed headline CPI falling to 1.8%, below the Bank of England’s target. With Q1 GDP growth also having been revised down to just 0.1%, the evidence points towards a cooling economy. This makes the market’s current pricing for future BOE rate hikes look very optimistic.
Political And Rates Risks For Sterling
We are also watching for policy shifts from the Labour government, which has been in power since the election of late 2024. There is growing noise about a potential pivot towards higher wealth and corporation taxes in the next budget to fund public services. This political uncertainty is another factor weighing on the pound.
The swaps market has only slightly reduced its BOE rate hike expectations, now pricing in 57 basis points over the next year. We saw a much faster repricing during the slowdown of 2025, and with the BOE’s own forecast of a negative output gap, we believe these hike expectations will soon be erased. A shift towards pricing in rate cuts could happen quickly.
Given these factors, we see value in positioning for a weaker pound over the coming weeks. Buying GBP/USD put options with a July expiry and a strike price around 1.3200 offers a clear way to profit from a potential move lower. This strategy protects against downside risk while defining the maximum potential loss.
Implied volatility in sterling options has been creeping up, suggesting the market is beginning to price in a bigger move. Therefore, traders could also consider bear put spreads to cheapen the cost of entry. This involves buying a higher-strike put and selling a lower-strike put to finance the position.
