October 3, 2017 - Written by James Fuller
STORY LINK Daily GBP AUD Update: Pound Sheds Gains over Poor UK Construction Performance
On Monday’s trading session, the Pound fell by over a cent against the Australian Dollar. From an opening exchange rate of 1.7066, the GBP/AUD pairing later closed in the area of 1.6951.
Pound Dips against Australian Dollar on Construction Disappointment
A surprise sign of contraction in the UK construction industry has damaged Pound demand today. The UK currency has made a minor loss against the Australian Dollar, but elsewhere more significant declines have been seen.
In detail, the UK construction PMI for September showed a drop from 51.1 points to 48.1, showing clear movement into the contraction range.
Highlighting what effect lower construction had on the UK was David Montague of L&Q;
‘ Today’s figures are worrying for the construction sector and at a time when more housebuilding is needed than ever before.
We need assurance that an appropriate immigration policy will keep the doors open to skilled overseas talent and that there will suitable investment in training at home. Without this, the figures we are seeing today will undoubtedly worsen.
What we need now is political and economic certainty’.
As well as the negative implications for the current housing shortage, the contraction news also means that the UK could be facing problems with business investment in underdeveloped areas.
Elsewhere, Jason Robinson from Euler Hermes has warned that there could be a ‘domino’ of failures for UK construction companies;
‘ Access to skilled labour is among the chief concerns within the construction industry. Without clarity on Brexit negotiations and in particularly EU workers’ rights, uncertainty will weigh on contractors’ pipelines because of the lack of concrete details over the future economic landscape.
While the performance of housebuilders has been positive in 2017, an increase in failures across construction appears unavoidable as contracts become more difficult to get over the line and tendering becomes keener. High profile profit warnings continue as legacy contracts take their toll on margins.”
Payment delays from large contractors could have a significant impact down the supply chain, and firms will need to be vigilant to avoid being caught in a ‘domino effect’ of failures’.
Australian Dollar Slips on Cautious RBA Comments
The main Australian news of late has been that the Reserve Bank of Australia (RBA) has left interest rates at 1.5%.
While this was not particularly newsworthy, the actual point of interest has been a statement from RBA Governor Philip Lowe. Striking a cautious tone, Lowe warned that;
‘ Growth in housing debt has been outpacing the slow growth in household incomes for some time’.
Under such conditions, a near-term RBA interest rate hike remains unlikely. That said, some economists believe that multiple rate hikes could come in quick succession when the RBA gets back on track.
Among these forecasters has been Ross Greenwood, Finance Editor at Channel Nine. Greenwood’s forecast has been that;
‘[There are] fresh calls that [interest] rates eventually will rise. Do note, most economists predicting a rate rise think there will be two.
Interest rate moves rarely come alone. There’s either no rate move or there’s two or three in a row’.
GBP AUD Forecast: Pound Volatility likely on Major UK Services Stats
Rounding off this week’s UK PMI measures will be two on Wednesday – the composite and services PMIs.
The composite figure looks at overall economic activity, while the services measure covers areas such as tourist activity and the performance of financial services.
The services sector is extremely important to the UK economy, as it is the single largest contributor to national economic growth.
Current forecasts are for a fractional decline in the services PMI, but not anywhere near the contraction range.
In the unlikely event that the PMI score does fall near 50 points, the Pound could drop sharply due to trader fears.
This would make a trio of falling PMI scores in September, lowering the chances of the Bank of England (BoE) considering higher interest rates in the future.
The composite PMI, which is of lower importance, might not prevent a Pound crash if it rises, assuming that the services score does drop.
Notable Australian data will be out sooner, consisting of composite and services PMIs tonight. There haven’t been any forecasts so far, but both measures previously showed growth.
Further ahead will be the Australian trade balance result on Thursday. Estimates are for a major expansion of the current trade surplus, which might firm the AUD GBP exchange rate.
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TAGS: Pound Australian Dollar Forecasts