The pound weakened somewhat against other major currencies after an indicator showed the services sector, the backbone of the U.K. economy, shrunk in May for the first time in over five years.
The services PMI for May fell to 49.8, the weakest since March 2003 and below the 50 mark that separates activity expansion from contraction.A sharp fall was seen in employment, which deteriorated at its sharpest rate since the survey began in 1996. However, the inflation components continued to rise, both for input prices as well as prices charged, adding to the Bank of England's worries and limiting the pound's fall.
“The services PMI index adds to the signs that the economy is in its biggest downturn since 1991,” said Mic Mills, a trader at TradIndex.com.“But the Bank of England can't cut rates because inflation is soaring, and that's why the pound has stayed where it is,” he said.
The dollar held steady versus a basket of six major currencies on Wednesday, keeping hefty gains made the previous session on Federal Reserve Chairman Ben Bernanke's warning about the inflationary threat from a weak U.S. currency.
The euro was pressured by soft euro zone retail sales data which added to an impression that the European economy is also facing stiff headwinds. The euro has now retreated more than 3% from record highs of $1.6018 hit in April.