The Pound began on the back foot yesterday morning as the UK’s construction purchasing managers' index (PMI) fell after hitting a four-month high in June. This ultimately shows Britain's construction industry was hit by a loss of momentum in housebuilding and civil engineering and follows on from the disappointing PMI manufacturing data at the start of the week. However, neither of these two sectors are dominant in the UK economy, so the effect on Sterling was limited before bouncing back later in the day. On a more positive note, UK house prices rose last month by 0.4% after dropping slightly in June. House prices appear to be stabilising and the injection into earnings growth could encourage more home-building, mortgage lender Nationwide said on Tuesday.
Overnight, Dollar strength occurred and treasuries fell from the highest levels since early June after Federal Reserve Bank of Atlanta President Dennis Lockhart spoke. Lockhart addressed the markets with a hawkish tone, suggesting that the Central Bank is almost ready to raise interest rates. Lockhart told the Wall Street Journal in an interview published Tuesday that it would take significant deterioration on economic data to convince him to put off increasing borrowing costs next month.
Across the pond, the US Dollar fell from its four month high as the market awaits the key employment report due on Friday. With the interest rate debate continuing in both the UK and US, speculation on a US “lift off” is gathering momentum. Friday’s payrolls number could further enhance this move or dent it. As a result we will not be surprised to see further profit taking in the lead up to the all-important non-farm payrolls. Meanwhile, new orders for U.S. factory goods rebounded strongly in June, matching expectations as demand continues to be robust for transportation equipment and other goods, a hopeful sign for the struggling manufacturing sector.
Today we get an early indication of how Friday’s US employment report will perform. The ADP employment report is historically short of the Non-Farm Payrolls and as a result less attention is paid to it. In addition, the UK PMI Service sector data will be key to Sterling’s performance.