The Organisation for Economic Co-operation and Development anticipates the Bank of England will keep its benchmark interest rate unchanged this year despite rising inflation. This outlook is based on the view that the energy cost-driven inflation shock will be "temporary," while the UK's persistently weak labor market will contain pricing pressures. In its latest set of forecasts, the OECD, often referred to as the think tank for advanced economies, stated that the Bank of England will cut rates by 25 basis points to 3.5% in 2027, even as inflation remains above the 2% target. Its GDP projections are largely unchanged from March, with this year's growth outlook slightly raised from 0.7% to 0.9%, but 2027 growth was modestly trimmed from 1.3% to 1.1%. The organization believes that, supported by transitory inflation factors and limited stimulus, the UK will remain the third-fastest growing economy in the G7 this year, trailing only the United States and Canada.
Separately, the latest S&P Global Eurozone Composite PMI data report for May 2026 indicates the region's economy is entering a typical "stagflation-like pressure" zone. This is characterized by continued contraction in economic activity, weakening demand, and cooling employment, alongside a renewed rise in input costs and output prices. The PMI data showed the eurozone's private sector activity index contracted in May at its weakest pace in 18 months, primarily due to weaker demand for goods and services—a key gauge of economic health. This marked the second consecutive month of decline for the composite PMI output, while cost pressures climbed to their highest level in over three years. The S&P Global Eurozone Composite PMI Output Index fell to 48.5 in May from 48.4 in April, hitting its lowest reading since November 2024, though it was above the preliminary estimate of 47.5. The overall Services PMI edged up slightly to 47.7 from 47.6, outperforming the flash reading of 46.4. Readings below the 50.0 threshold indicate a contraction in economic activity.
Key data to watch today includes the Eurozone's April Retail Sales month-on-month figure and the U.S. Initial Jobless Claims for the week ending May 30.
Dollar Index
The U.S. Dollar Index edged higher in choppy trading yesterday, closing modestly in positive territory and currently hovering around 99.50. Persistent safe-haven demand fueled by ongoing tensions in the Middle East continued to underpin the greenback. Hawkish remarks from Federal Reserve officials, which bolstered expectations for interest rate hikes, also provided support. Additionally, better-than-expected U.S. employment data released during the session contributed to the dollar's strength. Resistance is seen near the 100.00 level today, with support around 99.00.
Euro / U.S. Dollar
The euro declined in volatile trade yesterday, narrowly holding above the 1.1600 level and currently trading near 1.1610. The primary downward pressure came from a stronger U.S. dollar, which gained on the back of positive economic data, safe-haven flows, and heightened Fed rate hike expectations. However, hawkish commentary from European Central Bank officials helped limit the pair's losses. Resistance is anticipated near 1.1700, with support around 1.1500.
British Pound / U.S. Dollar
The British pound moved lower in choppy action yesterday, ending the day with a slight loss and currently trading near 1.3430. Profit-taking exerted some downward pressure on the pair. The main driver of the weakness was a stronger U.S. dollar, which advanced due to rising Fed rate hike expectations and safe-haven demand. Furthermore, diminished expectations for a Bank of England rate hike this year also weighed on the sterling. Resistance is seen near 1.3500, with support around 1.3350.
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