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Published On: Mon, Sep 4th, 2017

Pound v US dollar: UK construction activity slows but GBP floats on North Korea tensions


/USD is currently trading fractionally above opening levels at US$1.295, despite a surprise drop in the latest UK construction PMI.

Construction activity slowed unexpectedly during August according to data released by research company IHS Markit and the Chartered Institute of Procurement & Supply (CIPS).

The purchasing managers’ index fell from 51.9 to a yearly low of 51.1 against forecasts of a rise to 52.

Although home building recorded a strong rise, a significant decline in commercial work dragged the index towards the 50 mark that signifies no change on the previous month in sector activity.

Associate Director at IHS Markit Tim Moore said: “UK construction companies indicated that lacklustre growth conditions persisted during August.”

“Civil engineering work stagnated, which meant that the construction sector was reliant upon greater house building activity to deliver an outright expansion in output volumes.”

“Commercial development remained by far the worst performing category, with business activity falling at the fastest pace since July 2016.”

Although construction only accounts for around 6 per cent of the UK economy, markets are worried the sharp fall in commercial building – with the sector shrinking at the fastest rate seen since the referendum – may be emblematic of the wider attitude of businesses given the current political and economic uncertainty.

However, rising concerns over the situation in North Korea continue to weigh on the US dollar, allowing GBP/USD exchange rates to inch higher.

North Korea claimed on Sunday to have tested a hydrogen bomb, prompting South Korea to conduct live fire drills and approve the complete deployment of the United States Thaad anti-missile system in its territory – something President Moon Jae-in had initially opposed.

Defence Secretary James Mattis said after the North’s bomb test: “Any threat to the United States or its territories, including Guam or our allies, will be met with a massive military response, a response both effective and overwhelming.”

USD is therefore declining against other safe currencies as investors seek the best havens for their money.

Although the pound is not one of the world’s safest assets, the poor outlook on US monetary policy is helping to further pressure the US dollar lower and keep GBP/USD above opening levels.

Following a below-forecast non-farm payrolls report and an unexpected rise in the unemployment rate, odds of a December rate hike are now at 41.9%.

The UK services PMI will be the most influential data release tomorrow in terms of the GBP/USD pairing, not only because of its importance for the UK economic outlook, but also because the US calendar is devoid of fresh ecostats.

With services covering over 75 per cent of the UK economy, markets will be hoping the index follows in the footsteps of Friday’s manufacturing index to post a strong uptick, rather than a sharp decline as with today’s construction reading.



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