A mixed day for the pound

After suffering losses right across the board at the beginning of the trading month, the pound had more of a mixed day, making a small gain against the euro but losing heavily against the Australian dollar.

Markit reported that UK residential construction grew at its fastest rate since 2003 with its Purchasing Managers´ Index (PMI) for construction in the UK rising from a reading of 62.1 in December to show strong growth with a reading of 64.6 in January.

The data shows that the flow of new orders and purchasing activity increased at its fastest rate since August 2007.

In addition, activity in the housing sector expanded at its fastest rate since 2003 and commercial and engineering construction both grew at their quickest pace since 2007.

Tim Moore, Senior Economist at Markit indicated that “January’s survey provides reassurance that the UK construction recovery remains on track. Vendor lead-times were lengthening even before the surge in construction output began last year, and now firms are reporting that cutbacks to capacity have caused supply bottlenecks as demand picks up across the sector”.

Dr. Howard Archer, Chief European+Uk economist at IHS Global Insight commented that "An extremely strong across the board purchasing managers survey for January provides highly compelling evidence that the construction sector’s upturn remains intact at the start of 2014. This is despite the latest national accounts data estimating that construction output dipped 0.3% quarter-on-quarter in the fourth quarter of 2013."

Meanwhile Chancellor George Osborne warned yesterday that the UK’s housing shortage is likely to persist for at least 10 more years but insisted the coalition government’s controversial planning shakeup is having a positive effect but played down fears of a property bubble.

The US dollar lost ground for the second day in a row after data showed that US factory orders dropped by 1.5% in December, this hot on the heels of Monday's weaker than expected Chinese factory and US manufacturing data.

The big winner in the currency market yesterday was the Australian dollar which made strong gains across the board after the Reserve Bank of Australia (RBA) kept its key interest rate at the record low level of 2.5%. A further rate cut had been expected.

In addition, the accompanying statement from the RBA was far more neutral than had been expected signalling the end of the easing cycle.

The statement made reference to keeping interest rates stable and removed a reference that the Australian dollar was uncomfortably high. In previous policy meetings, the RBA claimed that it was ready to cut rates further if need be.