BNY’s Bob Savage explains that the United Kingdom (UK) government’s targeted cost-of-living package seeks to cushion households from Iran-related energy shocks while avoiding a repeat of large-scale bailouts. At the same time, UK flash Purchasing Managers' Index (PMI) data show the first private-sector contraction in over a year, with services weakness, persistent inflation pressures and rising recession risks shaping GBP/USD dynamics.

Targeted support versus weakening activity

"Reeves said the priority was protecting households from rising costs while avoiding large-scale support measures that could worsen inflation or destabilize markets."

"Cost-of-living support could help manage inflation expectations, but the fiscal cost is very real: restraint is needed elsewhere to avoid further curve steepening, but governments will need to weigh the political cost of spending cuts."

"Targeted support has helped limit fiscal premiums, to avoid adding to inflation pressures on bond markets, but any slippage could represent the next round of global steepening risk."

"UK flash PMI data for May indicated that private sector activity contracted for the first time in over a year, with the composite output index falling sharply to 48.5 points from 52.6 in April."

"Employment declined for a 20th consecutive month, led by service sector job cuts, and business confidence weakened to its lowest level since April 2025, pointing to growing recession risks alongside persistent inflationary pressure."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)