The pound showed little net movement against major peers on Thursday as markets balanced geopolitical risks tied to the Iran war with fresh evidence of weakening domestic activity.
Sterling was unchanged against the U.S. dollar at $1.3437, while it gained 0.13% versus the euro to trade at 86.42. The moves came after a survey revealed a notable drop in business activity across Britain.
S&P Global’s preliminary UK Composite Purchasing Managers’ Index for May slid to 48.5 from 52.6 in April. That reading is the first below the 50.0 threshold since April 2025 and well under the 51.6 median forecast in a Reuters poll. As conventionally interpreted, a PMI below 50.0 points to a contraction or slowing of activity.
The PMI decline was attributed in part to economic effects stemming from the Iran war and heightened political uncertainty at home, which domestic firms cited as factors contributing to the most widespread drop in activity in more than a year.
The softer PMI overshadowed otherwise encouraging recent data points for Britain. Last week’s first-quarter GDP print showed robust growth, and Wednesday’s consumer price index for April registered 2.8% year-on-year, down from 3.3% in March and beneath economists’ expectations for a 3.0% rate.
Commenting on the juxtaposition of recent data, Henry Cook, senior economist at MUFG Bank, said: "It’s a case of what might have been for the UK. In a different world, we’d be looking at that Q1 GDP number and saying this is a great platform for growth ahead, yesterday’s inflation number would have been potentially bang on target... we’d be looking at a couple of BoE rate cuts this year."
Cook added a second observation underscoring how external developments have altered the backdrop: "That’s a different world," he said, highlighting the ongoing closure of the Strait of Hormuz that has choked the global flow of oil and led to a surge in energy prices, upending central bank expectations and the global growth outlook.
Against that backdrop the Bank of England left interest rates unchanged in April while assessing potential spillovers from the U.S.-Israeli war on Iran. Bank officials have warned that those dynamics could, if conditions require, force a "forceful" tightening in borrowing costs.
Even so, short-term market pricing indicates a prevailing expectation of policy stability in the near term: money market bets imply an 86% probability that the BoE will keep rates unchanged at its next meeting on June 18.
Market context and implications
The confluence of weaker PMI readings, lower-than-expected inflation for April, and elevated energy prices tied to disruptions in oil transit points has created a mixed signal set for investors and policymakers. The pound’s near-term path appears tethered to further developments in regional geopolitical tensions and any successive economic releases that clarify whether the PMI drop reflects a temporary shock or a broader downshift in activity.