GBP/USD Analysis: What PMI Construction Numbers Mean

ForexNewsNow | Published on November 2, 2010 at 12:24 pm

intraday analysis - the Union JackNEW YORK (Forex News Now) – The pound fell in trading today against the dollar as the UK’s construction PMI report for October was softer than expected by analysts.

The Purchasing Managers’ Index for the Construction sector in the UK  – a prime component of the overall strength of the British economy – registered  at 51.6 for the month of October, down from the 53.8 mark reached in September and substantially lower than the 53.1 rating forecast by the market.

The PMI is a survey sued to gauge the overall sentiment of the prime movers in the construction sector and gives indications of whether or not the sector is expanding or contracting. A rating about 50 suggests expansion is taking place, but the steep decline from September to October suggests a contractionary trend is underway.

In reaction to the news, the pound sterling fell as low as 1.597 – well below the opening mark of 1.603 – before climbing back to 1.6023. The change so far represents a 0.11% drop below the open, countering the modest gains from Monday’s trading.

The news comes as GBP/USD – still down 2.25% on the year – works to reach the yearly high of 1.646 not seen since early January. The currency pair has struggled since a low in May but has gained on a weakened dollar and promising news for the British economy.

The PMI construction report, though, could be a harbinger of bad news in store for the pound if GBP/USD analysis creates a new trend.

The Bank of England has so far rejected plans to introduce more stimulus into the economy, citing strong growth in the third quarter. However, the UK has yet to initiate its austerity measures announced earlier in October.  The plan calls for a five-year program designed to cut public spending, reduce public sector jobs by 500,000, cut social benefits, raise taxes, and reduce the government’s influence in the economy.

The consensus is that a danger exists for the British economy if the austerity programs do not have the effect intended – namely, to cut down national debt and stave off recession.  Critics fear that the program will send the UK further into a recessionary spiral, and reports such as October’s PMI Construction numbers could be the beginning of that process.

As it stands now, GBP/USD analysis predicts that the pound will likely weather the report’s impact.  It has already come close to recouping its losses on the day and will likely move up against the dollar, especially with the stimulus policy set to be announced tomorrow by the Federal Reserve.

What the report does do, however, is place even more importance on other major British economic reports due to be released in the near future.

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