Surprise Slowdown in UK Construction Sector Triggers GBP/AUD Exchange Rate Decline

April 4, 2018 - Written by Tim Boyer

STORY LINK Surprise Slowdown in UK Construction Sector Triggers GBP/AUD Exchange Rate Decline

On Tuesday’s trading session, the Pound to Australian Dollar exchange rate saw a small decline from an opening level of 1.8332 in the morning that fell to the region of 1.8313 by the evening.

Tuesday’s most notable UK data was positive, although only just. This was the manufacturing PMI for March, which showed a rise from a revised-down 55 points to 55.1.

The fractional increase meant that manufacturing sector activity grew over the previous month, although traders were uncertain about how future readings could print.

Among the economists responding to the data was IHS Markit Director Rob Dobson, who said;

‘The key question is whether growth can now be sustained, albeit at a lower level, into the coming months.

On that front the news is generally positive. Manufacturers are still reporting solid inflows of new work from domestic and overseas markets.

Business optimism is holding steady at an elevated level, with over 54% of companies expecting output to expand over the coming 12 months.

With cost inflationary pressures also moderating to provide some respite for margins, the sector looks set to make further slow and steady progress as we head through the spring’.

Disappointing UK Construction Sector Slowdown Brings GBP/AUD Exchange Rate Decline

The latest UK economic data has damaged the Pound, as it has shown an undesired contraction in the national construction sector.

The PMI activity reading for March showed a decline from 51.4 points to 47, exceeding the worst estimates for a 50.9 point reading.

Snow was largely blamed for this slump in sector action, with CIPS Group Director Duncan Brock stating;

‘Snow stopped play in March, as the unseasonal weather restricted overall activity, lengthened delivery times and triggered the fastest drop in new orders since July 2016.

Civil engineering and commercial activity were the most affected, as housing became the best performer.

However, the marginal improvement in residential building was softer than in most of 2017 indicating there may be something more serious ailing the sector, as respondents also cited continuing Brexit-related uncertainty and disappointment over the performance of the UK economy’.

Among other problems caused by a contracting construction sector is the implied reduction in building houses in the UK, which continues to struggle with a shortage of affordable residences.

Australian Dollar to Pound Exchange Rate Rises as US-China Trade War Erupts

On the other side of the pairing, the Australian Dollar has firmed against the Pound and posted additional gains against peers such as the Chinese Yuan.

Recent AU economic data has been disappointing, so this AUD/GBP exchange rate rise is more down to US Dollar weakness and lower confidence in the Pound.

The US Dollar has struggled recently because of news that China is planning to impose $50bn worth of tariffs against the import of US goods, signifying an early engagement in a trade war.

This is in retaliation for US plans to charge on the import of Chinese goods into the country and the development has greatly unsettled USD traders.

Regarding the latest AU ecostats, retail sales have risen in February, but a worse-than-expected -6.2% drop in building permits granted during the month has also been reported.

GBP/AUD Exchange Rate Forecast: Risk of Further GBP/AUD Losses on UK Services Sector Slowdown

The Pound to Australian Dollar exchange rate could decline even further before the end of the week, should the services sector PMI out on 5th April slow as expected.

The reading is tipped to show a slowdown in March, which could alarm GBP traders given the importance of the services sector for national economic growth.

In the event that the services sector PMI shows a surprise rise, however, then the Pound to Australian Dollar exchange rate could make a recovery before the weekend.

High-impact Australian economic data due out shortly will consist of 5th April’s trade balance reading for February.

This is forecast to show a decline in the current surplus of 1.055bn to a smaller 0.7bn, which might devalue the Australian Dollar and leave the AUD/GBP exchange rate tight.

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