FX Focus: Pound snaps five-day losing run despite poor construction data

The pound snapped a five-session losing streak on Tuesday (2 August), edging higher against the dollar and the euro, despite another set of negative economic data.

Having struggled for direction earlier in the day, sterling was up 0.42% against the dollar and 0.22% against the euro by mid-afternoon, trading at $1.3235 and €1.1823 respectively. The pound's resilience was somewhat unexpected given it came after a report showed more signs of economic downturn following Britain's vote to leave the European Union.

According to data released by Markit Economics, construction activity in the UK contracted during July, shrinking at its fastest pace since June 2009 as businesses reigned in spending following the referendum result.

The pound, however, lost 0.13% against the Australian dollar after the Reserve Bank of Australia cut the benchmark interest rates to 1.50%, the lowest level in the bank's history.

The Bank of England is also widely expected to cut interest rates to an all-time low of 0.25%, when it meets on Thursday.

Ahead of the meeting, Kit Juckes, global head of FX strategy at Societe Generale, said Britain's economy was in need of fiscal and monetary policy working together. "The more uncertainty there is about fiscal policy, the more downside there is to sterling," he said.

"As for the current lack of clarity about policy towards inwards investment into the UK at a time where there's the small matter of a £100bn current account deficit to fund – goodness knows how much gilt yields would have to go up if they become the sole means of attracting foreign money."

Elsewhere, the euro gained 0.28% against the dollar to $1.1194, reversing the previous session's losses. Meanwhile, the greenback tumbled 0.79% against the yen to ¥101.58, after the Japanese government approved a stimulus package worth ¥28trn (£207bn, €244bn, $274.8bn) in a bid to revive a flagging economy.

Analysts, however, warned the stimulus measures might not be sufficient to pull Asia's second-largest economy back on solid ground. "The fiscal stimulus package approved by the Cabinet today will boost growth by much less than the headline figure suggests," said Marcel Thieliant, Japan economist at Capital Economics. "As such, the Bank of Japan still has more work to do reach its 2% inflation target."