The British pound fell sharply against the dollar on Wednesday after worse-than-expected preliminary Purchasing Managers’ Index (PMI) figures pointed to a steep contraction in UK economic activity this month.

Sterling dropped below $1.27, down from around $1.2730 before the data, after the S&P Global/CIPS flash composite PMI for August plunged to 47.6 from 52.1 in July. That was the lowest reading since February 2021 and below all forecasts.

The services and manufacturing indexes both signalled shrinking output, with services dropping into contractionary territory below 50 for the first time since early 2021. New orders fell at the fastest Rate since January 2021.

The downbeat PMIs suggest the UK Economy is deteriorating faster than feared amid sky-high Inflation and rising interest rates. The data led markets to pare back bets on further aggressive Bank of England tightening, weighing heavily on the pound.

“August’s flash PMI data show the UK economy on course for a likely recession later this year as demand continues to fall while inflation remains high,” said economist Chris Williamson from S&P Global.

The readings will likely reinforce BOE concerns about persistently elevated inflation even as growth slows sharply. But they may also give the central bank reason to slow the pace of hikes to avoid an excessively painful downturn.

Markets still expect rates to peak around 3.5% in mid-2023 from 1.75% currently. But the PMIs hinted tighter policy may already be having the desired effect in dampening demand and employment.

“The surveys suggest the economy has sunk into a downturn far deeper than anything seen prior to the pandemic,” said Williamson. With forward-looking indicators gloomy, a technical recession seems on the cards.

The pound may remain under pressure until data shows clearer signs of inflation coming under control. But less aggressive BOE tightening could start to lend support.