UK construction sector slowdown pressures pound

The pound found itself reacting unusually strongly to yesterday’s construction PMI, despite the index only accounting for a small percentage of UK economic output.

Ahead of the release of today’s UK data, GBP/EUR found itself trading in the region of €1.0849, GBP/USD was trending in the region of $1.2931, GBP/AUD lost -0.3% to trade at AU$1.6223, GBP/NZD was holding NZ$1.8030 and GBP/CAD was fluctuating around C$1.6022.

It’s time for the next UK services PMI this morning. Read on to find out why that’s so important…

What’s been happening?

The pound was tipped into a sharp decline yesterday after the latest Markit construction PMI for the UK showed a surprise slowdown in the construction sector.

The index was expected to edge marginally higher from 51.9 to 52, but it instead fell to a one-year low of 51.1; not far above the 50 mark that separates growth from contraction.

Although the construction sector only accounts for around 0.6% of UK GDP, markets were worried that the performance of the index was indicative of the general feeling of UK businesses.

Although house building still rose strongly, commercial construction posted a sharp decline, suggesting that businesses are curbing their investment in the face of the political and economic uncertainty currently shrouding the country.

GBP/EUR declined -0.4% on the back of the news, with the Euro strengthening thanks to an above-forecast result from the latest Sentix investor confidence index for the Eurozone.

Investor sentiment climbed unexpectedly from 27.7 to 28.2, instead of weakening to 27 in line with forecasts.

GBP/USD was able to hold gains, however, as markets were still wary of buying the US dollar after Friday’s disappointing labour market data, which suggested that the Federal Reserve is unlikely to hike interest rates any time soon.

Additionally, another escalation in the tensions between North Korea and the US, after Defence Secretary James Mattis warned that there would be a ‘massive military response’ should the North threaten the US or its allies, kept investors away from USD.

What's coming up?

The UK services PMI this morning will likely have a significant impact on the pound, given its importance. Services accounts for over 75% of the UK’s economic output, so a weak result here would point to another poor quarter-on-quarter performance for the UK economy during the third-quarter. A strong rise may help to soothe fears over the trajectory of the economy.

While there are a slew of Eurozone PMIs set for release, as well as retail sales data, EUR may not react particularly strongly to the figures, given that the markets are firmly focussed on Thursday’s European Central Bank (ECB) monetary policy decision.

The most influential US developments today will be the speeches from Federal Reserve officials Lael Brainard and Neel Kashkari. Brainard is speaking specifically on the economy and monetary policy, so it is likely the odds of a December rate hike will be readjusted following her address; whether up or down remains to be seen.

We’re here to talk currency whenever you need us, so get in touch if you want to know more about the latest news or how it could impact your currency transfers.

Phil McHugh,
Trading Floor Manager

Phil provides dealing and hedging services whilst also helping to manage Currencies Direct overall market exposure.