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Construction Sector Slowdown Weighs On Pound Sterling


Pound sterling gains were halted in the overnight following the release of the Markit/CIPS UK construction PMI survey.  Although still relatively positive, survey results were worse than had been anticipated by analysts, leaving some still skeptical of any short term UK economic recovery.  As a result, the British pound traded slightly lower to yesterday’s high at 1.5841 against the US dollar.  The exchange rate hit as high as 1.5869 in midday trading yesterday.

According to the construction sector survey, index readings dipped to a 51.4 in January – below the December 53.2 mark.  Although this is the 13th consecutive month of gains, the figure stands as the weakest reading in 4 months and compounds fears that the recession isn’t just over yet.  Notably, however, today’s survey findings still portend to a thin silver lining for Europe’s second largest economy.  According to subcomponent readings, confidence among construction companies and business leaders continues to be optimistic – although the same companies are unlikely to add to current payrolls.

The recent round of optimism seems to have been spurred on by improving month to month comparisons in recent weeks.  Notably, manufacturing sector activity improved to an 8-month high, while confidence among consumers recovered to the highest in almost the same time period.

Given the overwhelming and rising optimistic sentiment, today’s results may be temporary as traders begin to shift their sentiment to a potential turnaround in the UK economy.  This should support the current sterling momentum – if at least for another session or two.

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Forex European Preview 09.02.2009


The second revision of the Euro Zone’s Gross Domestic Product is set to confirm that the economy shrank -0.1% in the second quarter. The annual pace of contraction is expected to be revised slightly higher from -4.6% to -4.7%, but this is unlikely to be enough to stir the currency markets. Rather, traders will be looking at the expected upward revisions to the Household Consumption and Gross Fixed Capital components of the metric. An increasing number of market observers (ourselves included) are skeptical about whether the recent upswing in economic data around the globe is sustainable after the flow of government stimulus cash dries up. To this effect, measures of consumption and investment are going to be critical at this point in gauging whether a meaningful rebound in private demand can pick up where fiscal measures leave off.

In the UK, Construction PMI is set to rise to 48.0 in August from 47.0 in the previous month, showing that the industry shrank at the slowest pace in at least 13 months. However, the analogous metric for the manufacturing sector unexpectedly declined yesterday, suggesting rising unemployment may be starting to become a meaningful drag on leading indicators and opening the door for a downside surprise in today’s report.


Asia Session Highlights

Australia’s Gross Domestic Product grew 0.6% in the second quarter, topping economists’ expectations of a 0.2% result. The annual pace of economic growth advanced to 0.6%, rebounding from the 18-year low of 0.3% in the three months to March. The details of the report appear encouraging: private consumption and investment both advanced, the former by the largest margin since the fourth quarter of 2007 and the latter by the most since the three months through September of last year. Still, the acceleration seems to be a testament to the effects of the government’s ample fiscal package, including A$20 billion in cash handouts to households and A$22 billion in infrastructure spending, and the big question going forward will be whether the economy can maintain momentum once the flow of stimulus cash dries up. The Australian Dollar surged 50 pips against its US counterpart in the hour following the release but failed to meaningfully build on that momentum as stocks dropped nearly 2% in Asian trading, weighing down the risk-linked currency. Indeed, a trade-weighted average of the Australian unit’s value is now 95.6% correlated with the MSCI World Stock Index.


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