Pound Sterling looks robust ahead of the weekend as UK Construction PMI data beat expectations in a repeat performance of the Manufacturing PMI numbers released 24 hours earlier.
- The Pound to Euro exchange rate today: 1.1870
- The Euro to Pound sterling exchange rate today: 0.8425
- The Pound to Dollar exchange rate today: 1.3268
GBP remains well bid ahead of the weekend thanks to another better-than-forecast UK economic data release.
Construction PMI from IHS Markit and the CIPS beat analyst expectations by reading at 49.2, a poll of economists suggested a reading of 46.1 would be delivered.
Recall on the 2nd of August it was shown that the sector had slumped at a seven-year record pace.
"The downturn in UK construction activity has eased considerably since July, primarily helped by
a much slower decline in commercial building. Construction firms cited a nascent recovery in client confidence since the EU referendum result and a relatively steady flow of invitations to tender in August," says Tim Moore, Senior Economist at Markit.
The report suggests a renewed rise in staffing levels across the construction sector and a rebound in business expectations for the next 12 months.
"New orders and expectations have rebounded in the construction sector, but are still well off the highs. It is not surprising that construction has not matched manufacturing’s surge yesterday, since a weaker pound has less impact on the sector, and by pushing up the price of imports may actually act as more of a drag," says Chris Beauchamp, an analyst with IG in London.
The release has seen Sterling extend recent gains against the Euro and trade above 1.18.
Against the US Dollar we see more constrained trading ahead of the all-important US Employment Situation report due out at lunch-time.
"GBP/USD is so far unchanged on the day, but is still holding on to most of its surge from Thursday morning," says Beauchamp.
GBP shot higher on global FX markets following a surprisingly strong data release from the UK's manufacturing sector.
The five point increase in the headline index, from 48.3 to 53.3, was the joint-strongest month-on-month gain in the survey’s history.
It goes to suggest markets and analysts alike have been too pessimistically aligned against the UK economy and Sterling since the Brexit vote.
The adjustment in sentiment towards the UK currency necessitates it to move higher, and as a result it was the best performing currency in G10 foreign exchange:
Sterling Still Technically Pointed Lower
Despite the recent rally, technical studies confirm the key GBP exchange rates remain biased to lower levels as it will take further gains to turn the trend positive:
“The market remains confined to an intense downtrend and is in the process of consolidating just off the recent +30-year low from July. Any rallies are classified as corrective ahead of what should be the next major break below 1.2800 and towards 1.2500,” says a note from LMAX Exchange Research and Analytics.
LMAX believe that only once GBP/USD returns back above 1.3372 will we see the immediate pressure taken off Sterling that will force a shift in the chart’s structure.
One feels that it is a matter of time before the market shifts into a bullish setup.
However, we are told by others that the move higher in GBP is technical in nature and is without substance.
"While we have seen Sterling rebound we would the bounce as largely just short covering and likely to be temporary. Indeed we would argue that the data may embolden those within government looking for a hard Brexit, in the process ignoring single market access - harming medium run growth assumptions," says Jeremy Stretch at CIBC Markets.
In the wake of the manufacturing rebound CIBC say they would be wary of markets becoming over ambitious as regards an expected rebound in construction PMI due on Friday.
"Despite such concerns we would look for EUR GBP to correct back towards 0.8350," says Stretch.
For thos watching the GBP into EUR exchange rate this equates of an extension higher to 1.1976.
US Dollar Strength to Remain a Key Feature Going Forward
Apart from a recovering GBP, it has been the USD which is the currency to beat of late thanks to an increase in bets for the US Fed to raise rates later in the year with September even being considered as a potential date for such a move.
The gaps between 2-year OIS rates in the US and those elsewhere have increased across the board.
The promise of higher US interest rates will likely attract strong investment inflows as investors in a yield-starved world hunt out better returns.
Furthermore, "while investors now seem to be moving towards our view that the Fed will resume its tightening cycle this year, we still think they are underestimating the extent of rate hikes in 2017", says Alex Holmes at Capital Economics.
This spells for a stronger US Dollar which would naturally be bid higher on incoming investment flows.
Capital Economics also think that the Bank of Japan and the European Central Bank will eventually ease unconventional monetary further.
"As a result, we doubt the dollar’s recent run of strength is over just yet. Our end-2017 forecasts remain $1.00 against the euro (versus $1.11 now), $1.20 against sterling ($1.31), and 120 yen/$ (¥103)," says Holmes.