Pound Extends Loss Versus Euro as U.K. Construction Growth Slows

The pound extended its losses against the euro after a gauge of U.K. construction growth unexpectedly slowed to the weakest in a year in August.

Sterling was set to reverse its gains made Friday versus the euro. The British currency has been buffeted by a lack of progress in Brexit negotiations between the U.K. and the European Union. The third round ended in stalemate last week, spurring doubts that the two sides would be ready to discuss a trade deal any time soon. Markets will keep an eye on politics with the U.K. House of Commons reconvening on Tuesday after its summer recess.

  • EUR/GBP climbs 0.6% to 0.9212, breaking through initial resistance at 0.9186, Aug. 31 low
    • Next resistance at 0.9223, Sept. 1 high; support at 0.9151-50, Sept. 1 low, 21-DMA
  • The euro was broadly stronger ahead of the European Central Bank meeting later this week. It was also supported on Monday by haven bids after news of a possible missile launch by North Korea
  • GBP/USD little changed at 1.2942. Upside scenario favored with bullish traction likely to encounter bear interest at 1.3020-31 
  • IHS Markit’s construction Purchasing Managers’ Index fell to 51.1, the lowest since August 2016, and down from 51.9 in July
    • That’s below the 52 forecast by economists in a Bloomberg survey, although it remains above the 50 level dividing expansion from contraction
    • A similar gauge released Sept. 1 showed manufacturing PMI unexpectedly accelerated to a four-month high in August. Services PMI due Tuesday will provide further clues to the health of the economy
  • Brexit has taken a back seat for traders and fund managers trying to predict the pound’s outlook over the next few months while focus is shifting back to fundamentals and monetary policy
    • Implied three-month volatility in sterling is among lowest in G-10 peers
  • Strategists at Credit Agricole, including Valentin Marinov, “continue to see the outlook for sterling as a function of two seemingly conflicting drivers”
    • “On the one hand, economic fundamentals should continue to make sterling an unattractive long. On the other, already stretched currency undervaluation should limit its downside across the board”
  • Yield on 10-year gilts falls 1bp to 1.04%

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