The pound halts its losses

4 Ekim 2024

The pound halts its losses with the fastest pace of construction activity growth in two and a half years

Today’s market analysis on behalf of Samer Hasn, Senior Market Analyst at XS.com

The pound is up around 0.3% against the US dollar after three days of losses, reclaiming the 1.31602 level.

Better-than-expected construction data, with activity growing at the fastest pace in two and a half years, boosted the pound’s gains today. Escalating geopolitical tensions are likely to keep the Bank of England wary of cutting interest rates too quickly as upward risks to inflation mount.

This has sent UK gilt yields higher today, while US Treasury yields have held steady, giving the pound room to rally and trim its losses this week.

In today’s data, the S&P Global Construction PMI came in much better than expected. This came with the recovery in demand and new orders in various sub-sectors of construction, whether civilian or commercial, in light of the decline in mortgage rates and the stability of the local economy and political environment. All of this contributed to the rise in sentiment about the future of the sector, which was known for its extreme fragility during the turmoil of the past few years.

These results also came after the acceleration of the growth of house sales in the United Kingdom, with the cost of mortgages falling to their lowest level in 15 months.

Away from the UK, the escalation of geopolitical tensions in the Middle East, which are feared to disrupt some of the oil supplies from the region, especially from Iran, will lead to a sharp rise in crude prices, which will return inflation to rise in conjunction with the cutting of interest rates.

These tensions, although far from the UK, are likely to cast their shadow on the local economy from various aspects, as the Monetary Policy Committee of the Bank of England spoke about.

In addition, cutting interest rates and returning inflation to rise is the worst-case scenario for the Central Bank. To avoid this scenario, monetary policymakers may resort to being more and more cautious about making decisions to cut rates. While this narrative would have helped the pound resume its gains against the dollar, the opposite has happened as the dollar is also benefiting from investor inflows into it and into Treasuries as safe-haven.

The Bank of England Governor’s talk of a more aggressive approach to interest rate cuts earlier this week also put further pressure on the pound. However, this approach may remain in question as the upside risks to inflation return to the fore.