The pound continues its upwards trajectory

The pound continued its good start to the trading week yesterday, touching a fresh 3 month high against the euro after the Organisation for Economic Cooperation and Development (OECD) upgraded the UK’s growth prospects. The OECD now expects the UK economy to grow this year by 1.5%, up from its May forecast of 0.8% and bracketed the UK with the US, Canada and Japan as countries “expanding at encouraging rates”.

In publishing its interim economic assessment, the OECD reported that “A sustainable recovery is not yet firmly established and important risks remain. It is necessary to continue to support demand, including through unconventional monetary policies, in order to minimise the risk of the recovery being derailed”.

In addition, the latest survey of the UK construction industry showed that construction activity rose sharply in August, boosted by residential building with the Markit/CIPS UK construction purchasing managers’ index (PMI) jumping from a reading of 57.00 in July to 59.10 in August, the fastest pace recorded since September 2007.

The increase is largely down to the strong performance of the residential construction in the UK with output rising at the quickest rate since June 2010.

David Noble of the Chartered Institute of Purchasing & Supply noted the robust expansion across all three sub-sectors including house building, commercial and civil engineering. He warned however "How the sector navigates these tensions and manages the supply chain could come to define its performance over the coming months".

Elsewhere, the US dollar made headway against the other major currencies after better than expected US data reinforced the view that the Federal Reserve will start to taper its stimulus programme ‘sooner rather than later’..

The US ISM manufacturing sector index advanced from a reading of 55.4 in July to a stronger than forecast reading of 55.7 in August.

The stronger than expected US data follows robust manufacturing figures out this week from China, the UK and the euro zone. This has improved risk appetite in the market and helped the high yielding currencies like the Australian and New Zealand dollars recover some of their recent heavy losses.

The Australian dollar also received a boost following the decision by the Reserve Bank of Australia (RBA) to keep its benchmark interest rate unchanged at its record low level of 2.5%. Of interest, a subtle change to the RBA’s statement has led analysts to speculate that the RBA are now more comfortable with current policy than had previously been the case.

While the RBA is keeping its easing bias for the time being, it removed a statement that said that the inflation outlook allowed further scope to ease monetary policy.

Richard Grace of Commonwealth Bank of Australia said "The main surprise was that the RBA didn't reinsert the definitive easing bias into this statement after stressing it in the minutes of their August meeting. The Aussie may rally a little as a result."

RBA governor Glenn Stevens said growth was still below trend as the economy moves away from being driven by the mining sector and reiterated that the exchange rate was at historically high levels.

Stevens sais "It is possible that the exchange rate will depreciate further over time, which would help to foster a rebalancing of growth in the economy. The Board will continue to assess the outlook and adjust policy as needed to foster sustainable growth in demand and inflation outcomes consistent with the target."