Pressure on the pound after more signs the recovery is slowing

02 September 2010

Downbeat news on house prices and on construction sector growth added to evidence that UK economic growth may have already peaked, pushing the pound lower again. The FTSE was up just 5.8 points at 5373.2 after solid gains yesterday following better than hoped-for manufacturing data in China and the US. The pound was 0.29% lower against the dollar at $1.54 (see graph below) and one cent lower against the euro at €1.2. The Markit/CIPS purchasing manager’s survey added to worries that the construction sector will make a much smaller contribution to economic growth in the third quarter than it did in the second quarter. Construction activity fell to a six-month low as did new orders growth, while employment fell back for the second month in a row. Howard Archer, UK economist at IHS Global Insight, said: 'this reinforces suspicion that the 8.5% quarter-on-quarter jump in construction output in the second quarter overstated the true strength of the sector.' The data showed house building fell back to a 10-month low of 51.1 in August from 57.0 in July and Archer said 'this suggests that it is being increasingly affected by muted housing market activity so far in 2010, softening prices and increasing concerns about the outlook for the housing sector.' The latest report on house prices from Nationwide showed that prices were down for a second consecutive month. Prices were down 0.9% after a 0.5% fall in July. House prices were just 3.9% higher than a year before in August, having been 10.5% higher in the year earlier period back in April. While the news is good for would-be home owners and adds to hopes that prices will eventually become affordable again in the UK, it also adds to worries about the future levels of consumer spending. All of which makes the pound less attractive than rival currencies as an interest rate hike looks increasingly unlikely until well into 2011. In fact there remains a risk the Bank of England will add more stimulus if the newsflow remains disappointing. M&A speculation continued to be a focus in the stock market with Autonomy 4.6% higher on hopes that either Oracle or Microsoft may be interest in buying the software group. But gold miners were weighed down by broker caution. Citigroup analysts downgraded African Barrick Gold to 'hold' from 'buy' and shares led the pack lower, down 15.5p to 602p. Arm Holdings led the fallers, down after a downbeat note from JP Morgan Cazenove and as Panmure Gordon cut its target price on the chip maker to 265p from 275p and repeated its 'sell' view. Dixons owner DSG International added 0.3p to 25.61p, rebounding from recent lows after TV sales boosted revenues. Published by CityWire