U.K. Construction Contracts in September; Pound Slips

• U.K. Construction Contracts in September; Pound Slips

The U.K. construction contracted in September as Brexit uncertainty continued to weigh on new investment in commercial building.

Construction Purchasing Managers’ Index shrank to 48.1 in the month, according to the IHS Markit report released on Tuesday. This is the lowest in more than a year and weaker than the 51.1 forecast by economists. Also, it is below the 50 level that indicates expansion.

The report showed business confidence in the U.K fell in September, suggesting business optimism is being weighed upon by Brexit uncertainty. New business has now dropped for a third consecutive month in the construction sector and engineering job shrank the most in four years.

While this plunge in new business investment may reflect weak economic outlook, it also may be reflecting investors’ concern ahead of BoE rate hike in November. This is because an interest rate hike would impact costs of capital projects.

However, the manufacturing sector remained steady in September, grew below projection but above the 50 level that separates expansion from contraction. Thanks to consumer spending.

Input-cost inflation rose in the construction sector to over seven-month high in September and further support the argument that rising costs, in manufacturing and construction sectors, are likely to boost inflation headline to about 3 percent in September. Another strong indication that the Bank of England will be forced to raise interest rates from a record low of 0.25 percent.

The pound fell 0.28 percent against the U.S. dollar on Tuesday to $1.3222. Making it the third consecutive week of decline since peaking at $1.3655.

Therefore, a weak services sector, the biggest part of the U.K. economy, number on Wednesday would plunge the pound further against other currencies and towards $1.3046 on GBPUSD pair. A sustained break of that price level would validate bearish continuation. However, a temporary rebound should be expected as the odds of rates hike rises.