United Kingdom: Economic Resilience and Strategic Investment

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Defence Spending Announcement
Today, the UK government launches a strategic defence review, announcing plans to increase defence spending by over £15 billion. This includes investments in new submarines and the upgrade of nuclear warheads. Markets interpret the move as a signal of long-term fiscal commitment and geopolitical positioning, with a mild positive tone for the pound.

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Stronger-than-Expected Domestic Data
Recent UK data paints a picture of resilience:

- Manufacturing PMI for May shows a slower contraction than forecast.

- House prices increase by +3.5% year-over-year, pointing to stable domestic demand.

- Finalised Services PMI due later this week is expected to confirm similar strength.

- These readings support GBP sentiment and suggest the economy may be weathering global uncertainty better than expected.

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BoE Policy Outlook and Market Expectations
With inflation remaining above target and domestic data holding up, the Bank of England is expected to pause further rate cuts in the near term. Markets now price in only one more 25 bps cut for the rest of 2025. This week's remarks from Governor Andrew Bailey and Catherine Mann are in sharp focus for confirmation of this outlook.

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Sterling Nears Multi-Year Highs
GBP/USD trades around $1.355–1.357, holding just below the three-year high reached last week. Year-to-date, sterling is up over 8% against the dollar, underpinned by a hawkish BoE and relative economic stability.

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United States: Trade Tensions and Weakening Data

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Renewed Tariff Escalations
The U.S. administration doubles tariffs on steel and aluminium to 50%, reigniting U.S.–China trade tensions. This move increases global market anxiety and drags down the dollar amid risk-off sentiment.

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Weak Manufacturing Signals
The U.S. Manufacturing PMI for May falls to 48.5, its fourth consecutive month of contraction. This reinforces fears that the U.S. industrial sector is slowing, weighing further on USD strength.

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Dollar Slides Toward Multi-Year Lows
The WSJ Dollar Index declines about 0.7%, bringing it close to a three-year low. The combined effect of trade policy uncertainty and weak economic indicators undermines dollar demand.

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Treasury Yields Rise Amid Debt Concerns
While 30-year Treasury yields rise to 4.97%, the move is driven by weaker demand from foreign buyers and lingering debt concerns. Treasury officials continue to push back against fears of instability, but the pressure on the dollar persists.

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