UK Construction Activity Slumps and Pound Dips Against Dollar and Euro
The British pound experienced a dip against both the U.S. dollar and the euro on Thursday following the release of data that revealed a significant decline in UK construction activity. According to the S&P Global/CIPS UK construction Purchasing Managers’ Index (PMI), the sector experienced its largest slump since May 2020. The PMI fell to 45.0 in September, a substantial drop from August’s 50.8. Economists had predicted a more modest decline to 49.9.
The figures are particularly significant as they indicate that the sector is now in contraction, with a reading below 50 representing a decline in activity. However, it is important to note that the construction industry only constitutes a relatively small part of the UK economy.
Michael Brown, an analyst at TraderX, commented on the data, stating, “The construction data wasn’t particularly pretty but the sector is a relatively small part of the UK economy. The key takeaway is that all the PMI surveys are below 50, still implying contraction.”
The all-sector PMI, which encompasses services, manufacturing, and construction, recorded a reading of 48.2 in September, marking its lowest level since January 2021.
Following the release of this data, the pound weakened slightly against the euro, reaching 86.68 pence per euro by 0918 GMT, reflecting a decrease of approximately 0.1%. It also dipped by about 0.1% against the dollar, settling at $1.2125, just above Wednesday’s 6-1/2 month low of $1.20385.
The recent strength of the U.S. economy has led investors to believe that U.S. interest rates may rise further. Meanwhile, the Bank of England appears to be approaching the end of its tightening cycle. As a result, the pound has been facing challenges against the dollar in recent times.
Ashley Webb, a UK economist at Capital Economics, expressed concerns about the impact of higher interest rates on the economy. “Slowing momentum in activity, the recent decline in employment, and the sharp falls in core CPI and services inflation in August are clear signs that higher interest rates are weighing more heavily on the economy,” Webb said.
However, Webb also noted that Capital Economics predicts a gradual decline in wage growth and services inflation. The firm expects the Bank of England to maintain interest rates at the current level of 5.25% until late 2024.
Currently, money market traders are estimating a 30% possibility that the central bank will raise its Bank Rate by 25 basis points at the November meeting. However, this is likely to be the final increase of the tightening cycle.
The pricing from three months ago, which anticipated interest rates to peak above 6% by mid-2023, has significantly changed. The current outlook suggests a more subdued trajectory for interest rate hikes.
In addition to the construction data, the Bank of England’s Decision Maker Panel survey revealed that British companies have reduced their expectations for selling price increases over the last three months. However, they still predict high wage growth in the future.
Overall, these recent developments indicate a challenging period for the UK economy. While the construction sector faces a significant slump, the pound also grapples with the impact of a stronger U.S. economy and the potential for further interest rate hikes. The decisions made by the Bank of England in the coming months will play a crucial role in determining the country’s economic trajectory.
More detail via Reuters here… ( Image via Reuters )