Daily Economic Commentary: United Kingdom

[PipDiddy]

Risk aversion and weak fundamentals clobbered the pound yesterday, pushing the cable to a low of 1.4877 during the US session. The guppy was a bit more fortunate since it was able to keep its head above the 136.50 level.

The UK's annual budget report revealed that the government downgraded their 2011 growth forecasts from 3.5% to 3%, leading to a pound sell-off. Although the government announced that they'd need to borrow less funds this year, the pound was unable to recover as risk aversion spurred by Portugal's debt downgrade weighed it down.

The retail sales report is set for release at 9:30 am GMT today. An increase of 0.8% in retail sales is expected to follow the 1.8% slide seen last January. Given the recent slump in the CBI realized sales figure, the pound might be in for another disappointing result. Would it follow the euro in chalking up a new ten-month low?

[PipDiddy]

Put another mark at the pound’s lose column. The pound suffered another defeat against the greenback in yesterday’s foreign exchange tug-of-war. The GBPUSD fell to and settled at 1.4813 after touching a high of 1.5003 from 1.4866.

The UK’s retail sales for the month of February surprisingly rose by 2.1% versus the market’s estimate of 0.8%. This jump was buoyed by the 11.2% increase in sales at household goods stores. Vehicle fuel sales also gained by 9.1% during the month. Sales during the month of January, however, was revised down to -3.0% from -1.8%. The adverse winter condition in January was to blame why the consumers couldn’t go out and spend at that time.

The pound gained some support following the report. The sellers, though, took this as an opportunity to get a better price to short the pound again.

No major economic reports are due today in the UK. Today, though, is EU Summit’s second day of talks. Yesterday, ECB President Trichet welcomed a solution for Greece’s debt issues. Any positive developments in the summit could reflect in the pound as well.

[PipDiddy]

Thanks to "positive" news from euro zone, the Cable was able to retrace some of its losses last Friday. From Asian opening price that day of 1.4810, the Cable managed to rally and close out the week just a couple of pips below the 1.4900 handle.

For today, watch out for the net consumer credit report. The report, which measures the monthly change in the total new loans issued to consumers, is predicted to show a rise of 400 million GBP for February, slightly lower than the 500 million GBP increase the month before. Because being able to secure loans require financial stability, currency traders typically see rising loans as good for the economy.

We'll be seeing more data from the UK as the week rolls along.

On Tuesday, the Nationwide house price index (7:00 am GMT) and UK's current account balance (8:30 am GMT) are due. The Nationwide HPI is expected to show that the selling price of homes rose 0.2% this month, opposite the 1.0% decline seen last February. Meanwhile, the current account balance is predicted to show a 4.6 billion GBP deficit for the final quarter of 2009, slightly lower than the 4.7 billion GBP deficit from the quarter before.

On Thursday, the UK's manufacturing purchasing managers' index will come out. The PMI basically assesses whether the manufacturing industry is growing or not. A reading above the “line in the sand” figure of 50 indicates growth while a reading below 50.0 means otherwise. The consensus is a reading of 56.8 for March, a very slight improvement from the previous month's 56.6.

[PipDiddy]

Up and down trading for the pound yesterday, although it remained within range considering how volatile GBP pairs are. After covering the weekend gap, the GBPUSD closed slightly higher, finishing the day at 1.4982.

The United Kingdom got a bit of good news yesterday, when net consumer credit figures came in slightly better than expected. ₤500 million worth of loans were issued to consumers last month, which beat consensus of a ₤400 million. This indicates that consumer access to credit is improving, which is a sign of financial stability.

However, the boys over at S&P still seem unimpressed, as they are maintaining their negative outlook on the economy. They warned yesterday that if the UK doesn't fix its debt problems, it may not be deserving of its AAA rating. I don't really blame them though – things haven't been looking too rosy for the UK.

One thing to keep an eye on is developments in the political arena. As I've pointed out in the past, one reason why analysts are bearish on the British economy is because of the possibility of a hung parliament. What this means is that there could be no majority or ruling party in the UK government. How does this affect the economy? Well, one issue that the government needs to deal with is their growing debt. If government is split, then there could be a drag in coming up with any plans to address the debt problem.

In any case, Chancellor Alistair Darling will be speaking today at 8:45 am GMT. He may drop some comments regarding the S&P's statements, so watch out for his speech.

Today we could be in for some major moves, as final GDP figures are due at 8:30 am GMT. No revisions are expected to be made from the last report, which indicated that the UK economy grew by 0.3% during the last quarter of 2009. However, if we do see a downward revision, all hell might break loose...

The Nationwide HPI report is also due at 6:00 am GMT. The index measures the change in selling prices of homes, and it is projected that housing prices rose by 0.2% in the past month.

Lastly, the current account is also scheduled for release at 8:30 am GMT. The deficit for the last quarter is expected to be at ₤4.6 billion, just slightly less than the previous quarter's figure of ₤4.7 billion. Just recently, my main man Forex Gump made wrote a post about how the BOE actually wants a weaker pound in order to boost exports. Now, seeing as how the pound has been falling the past few months, could we see an upside surprise, and possibly even a surplus in today's report?

[PipDiddy]

Strong economic data propelled the GBPUSD to a high of 1.5127 yesterday, allowing the pound to erase its losses from last week. The GBPJPY also edged higher, reaching a high of 140.56 and marking its seventh day in consecutive rallies.

The Nationwide HPI printed a 0.7% increase in house prices for March, outpacing the consensus of a 0.2% uptick. This was a solid rebound from the 0.8% slide seen in February. It turns out that home owners postponed listing their properties online, causing housing demand to climb.

Meanwhile, the fourth quarter GDP enjoyed an upward revision from the previously reported 0.3% to 0.4%. The pound then banked on the news that the UK's economic expansion was slightly stronger than initially announced.

Furthermore, UK's current account balance came in better than expected as the deficit narrowed from 5.9 billion GBP to 1.7 billion GBP in the fourth quarter. The smaller deficit was mostly a result of a higher surplus in income and trade services for the period.

The only disappointing piece of economic news from the UK yesterday was its GfK consumer confidence reading. The report showed that consumers were a bit more pessimistic in March as the index unexpectedly dipped from -14 to -15. The pound pairs retreated after the release of this report but were able to get back on their feet immediately.

Looking ahead... Well, the economic coast is clear for the UK, at least for today. It's next set of economic reports which are due Thursday include the Halifax HPI, manufacturing PMI, and BOE credit conditions survey. Would we see another wave of upbeat figures from the UK? Stay tuned!

[PipDiddy]

The pound extended its winning streak against the dollar and yen yesterday to four and six, respectively. The Cable (GBPUSD) rose to and closed at 1.5174 from 1.5069. The Guppy (GBPJPY) also reached 141.87 from 139.83.

The UK did not release any economic reports yesterday. Risk appetite in the forex market, however, drove the anti-dollars like the pound higher.

Today at 8:30 am GMT, the UK’s manufacturing PMI for the month of March will be published. The index is seen to rise to 56.8 from 56.6. An increase in this account indicates an improving business condition in the UK’s manufacturing sector and therefore would usually be bullish for the GBP. It looks like the GBP bulls will be celebrating again if the index comes in at least in line with expectations.

[PipDiddy]

Thanks to improved risk appetite, the GBPUSD was one of the greatest performers last week, rising up more than 250 pips to close out last Friday above the 1.5200 handle. Given the strong case of risk appetite, would we see the GBPUSD stage another stellar rally this week?

The only obstacle that held back the GBPUSD's advance last week was the worse-than-expected results of the US non-farm payrolls report. It came out with a reading of 162,000, lower than the 185,000 gain initially predicted. This dampened risk appetite, causing the GBPUSD to fall 100 pips to 1.5200 from its highest price level last week.

No data is expected out of the UK today, but expect a lot of economic events, particularly the BOE's interest rate decision, are coming up ahead.

First up, the Halifax Bank of Scotland house price index, will be released either tomorrow or on Wednesday. The report, which measures the change in the selling prices of homes funded by the HBOS, is expected to show 0.6% increase in March, opposite the 1.5% decline from the month before.

On Wednesday, at 8:30 am GMT, UK's services purchasing managers' index will be released. The services PMI is designed to see whether UK's services sector is growing or not. A reading above 50.0 indicates expansion while a reading below 50.0 means otherwise. The forecast for March is a reading of 58.2, slightly lower than February's 58.4.

On Thursday, UK's manufacturing production report and the BOE's interest rate decision are due. The manufacturing production report, which will be published at 8:30 am GMT, is predicted to show a 0.7% rise in February after dropping 0.9% the month before. On the other hand, at 11:00 am GMT, the Bank of England will announce its decision on interest rates. As usual, it is widely expected for the BOE to keep rates steady at 0.50% and hold off expanding its quantitative easing program.

It looks like a lot of positive expectations for economic data this week... If we see these reports come out on target, or even better-than-expected, we could see another run in risk appetite, which would help the GBPUSD regain the losses it experienced during the first quarter of 2010.

[PipDiddy]

Relatively tight trading on the cable yesterday, as it stuck within a range of about 80 pips. With some economic reports on deck today, could we see some stronger moves?

At 8:30 am GMT, the construction purchasing manager index is scheduled for release. The index measures the confidence of business managers in the construction industry, with 50.0 being the score that separates contraction from expansion. Projections are for a reading of 48.8, which would be a slight improvement over last month's release of 48.5. Now, if the index comes in to post a score above 50.0, indicating actual expansion, this could send GBP bulls jumping for joy!

Later on at 11:00 pm, the nationwide consumer confidence index is due. The index has been steadily improving the past few months, printing a score of 80 last month. Today's release is projected to come out at 81. Have consumers become confident over the economy? Or have they become more concerned, especially given the uncertainties in the political arena? We will have to wait and see!

Tomorrow will be busy once again, as both the Halifax housing price index and the services PMI reports are due. Housing prices are seen to have risen by 0.6% in the past month, while the services PMI is expected to have remained relatively steady with a reading of 58.2. Normally these are considered to be high impact reports, but it will be interesting to see the markets react to them. After all, we've got the BOE's interest rate decision coming in on Thursday...

[PipDiddy]

V for victory! The pound successfully pulled up from its sharp dive against the greenback and etched a nice V-formation on the GBPUSD 1-hour chart. The question is: Would the pound be able to sustain its rally or would it resume its dive later on?

Earlier during the day, UK Prime Minister Gordon Brown announced that the general elections will be held on May 6. This caused fears of a hung Parliament, wherein no political party holds majority of the seats, to resurface. A hung Parliament - no connection to William Hung whatsoever - is an unfavorable political situation since split decisions between the House members could delay important government decisions.

Fortunately for the pound, UK's construction PMI came in better than expected. The March reading climbed from 48.5 to 53.1, past the 50.0 mark which indicates that the industry is expanding. This marks the indicator's 2-year high as new orders for housing and commercial sectors surged in March. As a result, the GBPUSD landed back above the 1.5200 mark and climbed higher after the US Fed delivered skeptical comments concerning their monetary policy.

It'll be the services sector's turn to release their March PMI reading today at 4:30 am GMT. The PMI could dip from 58.4 to 58.1, implying that the expansion in the industry slowed a bit during the month. A weaker than expected figure could force the pound to return its recent gains.

[PipDiddy]

The pound received another pounding from the yen and the greenback yesterday. The Guppy (GBPJPY) fell and closed at 142.26 from 143.17. The Cable (GBPUSD) also slid to 1.5247 from 1.5279.

The UK’s services PMI dipped more than expected to 56.5 in March from 58.4, indicating that the growth in the UK’s service sector had slowed. Services grew at its highest rate in February as businesses tried to get back on the game after being benched by the harsh winter conditions. Activity, however, dipped in March when new businesses were a lot lesser than projected.

The pound weakened following the report.

The UK’s Halifax HPI and February industrial and manufacturing production will be on tap later at 8:30 am GMT. House prices are seen to have gained by 0.65 after dipping by 1.5% during the previous month. Both industrial and manufacturing productions are also expected to have risen by 0.5% and 0.7%, respectively. Positive results in these accounts could halt the pound’s present decline.

The market will probably focus on the Bank of England’s interest rate and asset facility program decision today at 11:00 am GMT though. The bank is seen to maintain its interest rate at 0.50% and its asset purchase facility program at £200 billion. According to some economists, the bank is likely to hold their easing programs until November since the economy is still in a fragile condition. They said that it is vital for the bank to keep the interest rate low in order for the economy to sustain its recovery. Doing so, however, would be bearish for the GBP.