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GBP/USD Jumps 80 Pips Higher on the BOE, While Construction Turns Negative Again

Posted Thursday, February 4, 2021 by
Skerdian Meta • 2 min read

UK Construction Report January

Construction is one of the strongest sectors of the UK economy, and it has also been quite resilient. It bounced back after the 2008 financial crisis and again after the lockdowns last year. But, with the new coronavirus restrictions in the UK, this sector tumbled into contraction again, after several months of expansion.

This is another negative component for the UK economy. Nonetheless, the GBP has jumped higher, with the GBP/USD trading around 80 pips up, after the Bank of England meeting, which left everything as it was. I assume traders were expecting the BOE to announce or hint at more monetary stimulus, which didn’t come this time.

UK January Construction PMI Report

January construction PMI 49.2 vs 52.8 expected
February construction PMI 54.6

The marginal decline last month marks an end to the seven consecutive months of expansion in UK construction activities, as lockdown measures weighed on new order growth, resulting in a drop in overall construction output for the first time since May last year.

Markit notes:

“The construction sector ended a seven-month run of expansion in January as a renewed slide in commercial work dragged down overall output volumes. House building was the only major construction segment to register growth, but momentum slowed considerably in comparison to the second half of last year.
“Construction companies continued to report major delays in the receipt of imported products and materials from suppliers, with congestion at UK ports contributing to the sharpest lengthening of delivery times since May 2020. Adding to the squeeze on the construction sector, rising steel and timber costs led to the fastest rate of input price inflation in just over two-and-a-half years.
“The latest survey highlighted that construction companies have become more cautious about the business outlook. Output rebounded quickly after stoppages on site at the start of the pandemic, but hesitancy among clients in January and worries about near-term economic conditions resulted in a dip in growth expectations for the first time in six months.”

BOE Monetary Policy Decision – February 4, 2021

BOE leaves bank rate unchanged at 0.10%
December bank rate was 0.10%
Bank rate votes 0-0-9 vs 0-0-9 expected

Gilts purchases £ 875 billion
Corporate bond purchases £ 20 billion
Total asset program £ 895 billion (unchanged)

Existing stance of monetary policy remains appropriate
Financial markets have remained resilient
GDP is projected to recover rapidly towards pre-virus levels over 2021
Vaccine rollout is assumed to lead to an easing of virus-related restrictions
Outlook for the economy remains unusually uncertain
CPI inflation is expected to rise quite sharply towards the 2% target in the spring
Does not intend to tighten monetary policy, at least until there is clear evidence that significant progress is being made in eliminating spare capacity and achieving the 2% inflation target sustainably
Full statement

The BOE has also cut its growth projections for the year, estimating that the 2021 GDP will be 5%, compared to the November forecast of 7.25%. That said, the pound is jumping higher as the central bank steers clear of firm commitments to negative rates once again.

In the updated review, the BOE says its actions should not be construed as a signal that negative rates are coming and that it carries an operational risk. However, the central bank still says that financial institutions should start preparations if needed.

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