Pound up as construction data beats estimate

The British pound is in positive territory today. In the North American session, GBP/USD is trading at 1.1535, up 0.13%.

UK Construction PMI remains in contraction mode

The UK PMIs releases for August are reflecting weak conditions across the economy. Last week, Manufacturing PMI came in below the 50.0 neutral level, indicating contraction. Services PMI managed to stay in expansion territory, but just barely with a reading of 50.9. Today’s Construction PMI improved to 49.2 (vs. 48.9 in July), above the consensus of 48.0. The stronger-than-expected release has given the pound a slight boost but will be of concern to investors since it marks a second straight contraction in construction.

Incoming Prime Minister Liz Truss will have more than just soft PMIs to worry about. Inflation rose to 10.1% in July, as the cost-of-living crisis remains a priority for the government. Energy bills are expected to skyrocket next month, and the government may freeze the increase, but the cost would be astronomical, possibly as high as 130 billion pounds. Inflation is being felt throughout the economy and Truss will be hard-pressed to provide relief everywhere it’s needed.

The deteriorating outlook for the UK economy is taking its toll on the British pound, as investors don’t like the country’s economic outlook. GBP/USD fell as low as 1.1443 on Monday, its lowest level since 1985. The pound has more room to fall, as the energy situation in Europe remains grim and the Fed plans to remain aggressive in its fight against inflation. Truss has pledged to cut taxes in order to give the economy a lift, but this could result in inflation rising higher. I don’t envy Truss, who will have to quickly show some improvement in the economy in order to gain the confidence of the markets and the public in order to stay in office.

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GBP/USD Technical

•  GBP/USD has support at 1.1417 and 1.1324
• There is resistance at 1.1589 and 1.1682

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