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Great Britain Pound Firm Despite Falling Construction Index, Outlook for Monetary Easing

September 4, 2020 at 10:16 by Vladimir Vyun

A lot of pound sterling notes of varying valueThe Great Britain pound rose today despite the gloomy outlook and an unexpected drop in the construction index. While the sterling has lost its gains versus commodity currencies by now, it continued to trade above the opening level against other most-traded peers.

Michael Saunders, External Member of the Monetary Policy Committee at the Bank of England, delivered a speech titled “The Economy and Covid-19: Looking Back and Looking Forward”. In it, he voiced his opinion about the probability of additional monetary easing from the BoE:

The Committee noted at the August meeting that it would continue to monitor the situation closely and stands ready to adjust monetary policy accordingly to meet its remit. I consider it quite likely that additional monetary easing will be appropriate in order to achieve a sustained return of inflation to the 2% target.

Saunders also said that the central bank will not be in a rush to tighten the economy as there is no time limit on how long the monetary policy can be extremely loose:

There is no automatic time limit on our willingness to maintain a loose monetary policy stance. In particular, as the Committee noted in August, we do not intend to tighten monetary policy until there is clear evidence that significant progress is being made in eliminating spare capacity and achieving the 2% inflation target sustainably.

The question of a trade deal between the United Kingdom and the European Union remains a sensitive issue. It looks like neither of the sides is willing to compromise, and there is a growing worry that the agreement will not be reached before the deadline at the end of the year. While analysts are still expecting the deal is still likely to be achieved, such worries are weighing on the sterling.

The headline seasonally adjusted IHS Markit/CIPS UK Construction Total Activity Index demonstrated a significant drop last month, falling to 54.6 in August from 58.1 in July. That was an unpleasant surprise to economists as they have predicted an increase to 58.5. While the reading above 50.0 indicates that the industry continues to expand, the drop means that the pace of expansion has fallen sharply. The report commented on the result:

August data pointed to a setback for the recovery in UK construction output, with growth easing from the near five-year high seen during July. Survey respondents mostly suggested that a lack of new work to replace completed contracts had acted as a brake on the speed of expansion.

GBP/USD rose from 1.3280 to 1.3295 as of 10:15 GMT today. GBP/CHF edged up from 1.2076 to 1.2091. At the same time, GBP/CAD dropped from 1.7434 to 1.7389.

If you have any questions, comments, or opinions regarding the Great Britain Pound, feel free to post them using the commentary form below.

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