UK CONSTRUCTION PMI BELOW EXPECTATIONS.

April 2, 2015
UK Construction PMI Below Expectations.

GBPAUD reached a historical resistance at 1.9697 (a spring 2009 low) in February and has since reacted lower from this level. Over the last two weeks the pair has been rallying strongly and is nearing the resistance area again. Fundamentals and the strong weekly trend support the bids in GBPAUD but price has rallied strongly and reached a potential resistance level. Therefore it pays to monitor the market more closely and time the entries at support levels in pullbacks.

Sterling has been trending higher against the Australian dollar as it is likely that the Reserve Bank of Australia will cut the interest rates either in April or May while the UK economy is rather strong.  A recent editorial in The Australian that said “a cut in interest rates either next month or in May is a virtual certainty,”. A 25 basis points cut at the May policy review is likely, which would take the cash rate to a record low 2.0%.

Australian economy is slowing while the commodity prices have dropped significantly. Growth has slowed, with GDP rising 0.5% q/q in Q4, but slowing to a 2.5% y/y pace from +2.7% y/y in Q3. The RBA’s Index of Commodity Prices has tumbled. The index has fallen by 20.6% y/y in SDR terms through February, driven by lower prices for bulk commodities. At 72.5, the index is at its lowest level since December 2009, extending pullback from a 124.7 peak in July 2011. In addition, inflation has slowed, with CPI dropping to 1.7% y/y in Q4 from 2.3% y/y in Q3.

At the same time UK data improves and even though the elections cause a certain level of anxiety in the markets (no one likes uncertainty) the GBPAUD has been rather strong lately. Incoming UK data has been rather strong. The future data should be positive for sterling, though concerns of a hung parliament outcome at the May-7 general election are likely to crimp enthusiasm for the UK currency and assets, especially if the Scottish Nationalist Party ends up holding the balance of power. UK Markit manufacturing PMI survey came in at 54.3 in March, fractionally above our survey median for 54.3 and improving from February’s 54.1 reading. This is the third consecutive month of improvement, affirming that activity in the sector is reaccelerating after a soft patch in Q4 last year.

UK construction PMI was much worse than expected at 57.8 in March, down from February’s 60.1 and well below the Reuters median forecast for 59.5. The 2014 overall average was 61.8, so the data points to a drop-off in momentum. The decline in March was largely reflective of a slowdown in civil engineering activity growth, which the survey found may be related to uncertainty ahead of the too-close-to-call May-7 general election. Job creation also remained below 2014 levels. However, at 57.8 this still signals a robust level of activity while business confidence rose to a nine-year high. Sub-contractor charges rose at the fastest pace since the survey began in 1997. Overall, the strong outlook offsets the decline in the headline, and the slowdown in activity in some areas may pick up after the May election.

Janne Muta

Chief Market Analyst
HotForex

Disclaimer: Nothing in this communication contains, or should be considered as containing, an investment advice or an investment recommendation or a solicitation for the purpose of purchase or sale of any financial instrument.

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