Daily Economic Commentary: United Kingdom

[PipDiddy]

Even though the cable stayed range-bound last Friday, it managed to edge higher and close a few pips shy of the psychological 1.4500 handle. The guppy was also able to erase some of its recent losses as it landed back above 130.00.

Surprisingly, the pound was feeling a bit lighter before the week came to a close. Aside from the rebound in risk-taking, better than expected economic reports also provided support for the pound. UK reported a 10 billion GBP budget deficit for April, which was less than the expected 11.1 billion GBP shortfall. This was accompanied by a sizeable downward revision in the budget deficit for the last fiscal year, suggesting that UK's debt is not so bad after all. Still, the new coalition government feels the pressure to cut down on spending and trim its deficit.

Aside from that, business investment saw a 6.0% increase for the first quarter of the year instead of the estimated 0.5% decline. This uptick, which was led by a rise in investments in the services sector, was the first positive reading in two years.

Mortgage approvals, on the other hand, came in weaker than consensus. Instead of climbing from 51K in 54K in April, mortgage approvals fell to 47K, its lowest level in almost a year. This worse than expected figure was possibly a result of tight credit conditions in the UK.

Up ahead, the UK has a few more top-tier reports due. Tomorrow, the revised first quarter GDP reading will be released and is expecting an upward revision from 0.2% to 0.3%. Another mortgage approvals report, this time compiled by the British Bankers' Association, is on tomorrow's docket.

On Wednesday, the Nationwide house price index is on tap. The report is expected to show a 0.5% increase in house prices during the month of May, which would be half as much as the rise seen in April. The CBI realized sales and GfK consumer confidence report are due Thursday. Would these upcoming releases be enough to push the cable out of its range? Stay tuned!

[PipDiddy]

It looks like the Cable is really holding on to its range! After spiking briefly above the 1.4500 handle during the European trading session, the bears saw quickly jumped in and took the Cable lower. It ended the US session at 1.4433, 35 pips lower from its opening price this week.

The likely cause for the Cable’s drop was the reemergence of risk aversion… again. Apparently, CajaSur, a major commercial bank in Spain which lost 426 million EUR in revenues in 2009, was seized and taken over by Spain’s central bank.

Today, at 8:30 am GMT, two important economic reports will come out.

The first one is UK’s second estimate on its GDP. According to the preliminary report, UK's economy only grew by 0.2% during the first quarter of this year. Economists are expecting this figure to be revised up to 0.4%. The positive expectations on the secondary GDP report could provide some intraday support for the pound.

The second one comes in the form of the BBA mortgage approvals. It is expected to report that 37,600 mortgages were issued in April, up the 34,900 figure seen the month before. Rising mortgages is usually seen as positive for the economy because it indicates that more and more people are eligible in taking out loans.

[PipDiddy]

Ranging, ranging, ranging! The GBPUSD has been stuck in a range the past two weeks now, bouncing between 1.4250 and 1.4500. Will this be the recurring theme this week?

The pound dropped throughout the day, as risk aversion continues to dominate traders mindsets. Some have suggested that the tension between North and South Korea has caused traders to become jittery. Now, I’m not too sure if this was the actual cause, but it’ll be interesting to see how this develops down the road. With traders jumping all over any bad news, if this situation continues to worsen, we could see more traders move their assets away from higher yielding currencies like the pound.

And now, on to some economic data and news…

GDP figures released yesterday came in line with expectations, as first quarter growth was revised up slightly to 0.3%. While this was somewhat good news, you have to remember that the previous quarter, the UK economy grew by 0.4%. In addition, government spending rose by another 0.5%, which put spending up 3.1% from a year ago. This indicates that the growth of the economy has been fueled by government spending.

Hmmm, isn’t newly elected Prime Minister David Cameron vowing to cut budget spending? The economy is already showing anemic growth and if the government has to cut its spending (and it does!), now what? Another round of contraction later this year perhaps?

No major data coming out today, so may see more range bound motion on pound pairs. Just be careful out there and stay on top of the news – as I always say, risk sentiment can change on a dime so watch out and keep those risk management rules in check!

[PipDiddy]

For the eighth day in a row, the cable stayed inside its range between 1.4250 and 1.4500. The guppy's movement was also relatively calm as it paced back and forth between 129.05 and 130.65.

The BBA mortgage approvals report showed that only 35.7K home loans were approved in April, which was less than the estimated 37.6K. Still, home loans in April were a tad higher than the 35K mortgages approved last March, reflecting a slight improvement in housing demand during the month. On an annual basis, mortgage approvals are down by 22%, which means the UK's housing sector is still weak.

The pound was able to hold on to its recent gains after the Organization for Economic Cooperation and Development suggested that the BOE must raise its benchmark rate by the end of the year. They pointed out that UK's annual CPI already exceeds the central bank's target and that tightening measures are necessary to keep inflation contained. However, the BOE maintained that inflationary pressures are expected to tone down soon, which would eventually bring their CPI within the target range. Well, it seems that the OECD and the BOE have opposing perspectives when it comes to inflation and policy measures, leaving traders uncertain where to take the pound.

Today, a couple of important economic reports are due from the UK. First, the CBI realized sales report, an indicator of consumer spending, is set for release at 10:00 am GMT. The reading for May is expected to hold steady at 13, which implies that the level of sales volume didn't change during the month. Later on, at 11:00 pm GMT, the GfK consumer confidence index will be reported. The index could climb up a notch from -16 to -15, indicating that consumers were slightly less pessimistic this month. Better than expected results could give the pound enough energy to bust out of its range so stay tuned for those reports!

[PipDiddy]

Risk off, risk on… Thanks to improved risk appetite, the Cable was finally able to bust out of its range. The Cable spiked above 1.4600 temporarily before settling at the 1.4550 region at the end of the US trading session. The Guppy, too, followed suit and finished the day more than 300 pips higher at 132.70.

The burst in risk appetite was spurred by China’s denial that it plans to dump its euro zone debt holdings. China said the rumors were “groundless” and that Europe remained to be one of their main investment markets.

While all that risk taking was going on, the UK was able to sneak in a not-so-good piece of data. I’m talking about their distributive trades survey, which came with a reading of -18, completely opposite the +16 initially predicted. This meant that the sales volume of both retailers and wholesalers was lower this month than in April.

Even though no data is scheduled for release from UK today, we still may see the pound produce some one-directional moves. It is a Friday, which means currency traders may start taking profit and close up shop for the week. Be careful out there!

[PipDiddy]

After testing the 1.4600 late last week, the GBPUSD came back down to earth and is now hovering just below the 1.4500 handle. With a slew of high impact reports coming out around the world this week, it could be a make or break week for those GBP bulls!

No data came out last Friday from the UK, but that didn’t stop the pound from taking a hit. Risk aversion took its toll on the markets as Fitch downgraded Spain’s sovereign debt rating. Ummm, doesn’t the UK have some serious debt problems as well? Hmmm... I wonder what the new British government is going to do about this. That's right, I'm talking to you Mr. David Cameron! It look like you got your work cut out for you! Who knows, the UK might be next in line for a downgrade!

We may see continued range-bound trading in the GBPUSD today, as UK traders won’t be sitting on their buttocks all day as they’ll all be off for the long weekend. This however, shouldn’t remain the theme for the rest of the week, as we’ve got a couple of red flags coming out.

Tomorrow, the manufacturing purchasing manager’s index is scheduled for release at 8:30 am GMT. The index is expected to print a reading of 57.8, slightly lower than May’s release of 58.0. The report surveys business managers across the country on their thoughts of market conditions. A lower score would indicate that business managers are slightly less optimistic about the economy.

Throughout the week, we’ll also be sprinkled with housing market data in the form of the Halifax (any day this week) and Nationwide (Thursday) housing prices index reports. The reports are expected to show that housing prices rose by 0.3% and 0.5% respectively. Watch out if data reveals that housing prices didn’t increase – it would signal more weakness in the housing market and give more reasons for the Bank of England to keep interest rates at current levels.

[PipDiddy]

Despite the US traders off on holiday, the pound still managed to muster up some strength and stage a rally yesterday. The Cable ended the day at 1.4542, up almost 100 pips from its week open price.

The only piece of data of interest today is UK’s manufacturing purchasing managers’ index at 8:30 am GMT. It is expected to print a reading of 57.9 for May, which is slightly lower from the 58.0 reading seen the month before. The report has created quite a hefty market impact in the past, so I suspect it will do the same again later. If the actual result comes in lower than forecast, we may see the Cable head back to the previous day’s lows.

Also, as I’ve cautioned in my other updates, watch out for some volatile moves today as traders come out from their long holiday weekend to the trading floors to do some… uh, trading!

[PipDiddy]

Despite the fresh round of risk aversion that hit the markets yesterday, the pound burst higher on good data that was released. The GBPUSD touched the 1.4700, marking the highest level its been at in two weeks. Can the sustain its gains?

Traders coming back from the long weekend got a nice welcome back present in the form of the manufacturing purchasing manager’s index, which came to have a reading of 58.0. Just in case you forgot, this matched March’s score which was a 15-year high! Based on this data, analysts believe that manufacturing will help GDP growth match the first quarter figure of 1.2%!

Traders also jumped on the pound bandwagon when rumors circulated that AIG rejected an offer from Prudential for one of its Asian insurance business segments. Just to make things a little clearer, let me explain:

AIG is a US based firm that owns business around the world. Prudential, a British company, is looking to buy AIA, a Asian insurance business, from AIG. In order to complete this sale though, Prudential would need to unload their pounds in favor of dollars. Because of the magnitude of the deal, this could adversely affect the pound as it could lead to a major sell-off. However, now that the initial offer was rejected, traders decided it was safer to buy up the pound, which helped its rise yesterday.

Today, housing market data will be available in the form of the construction PMI and mortgage approvals report at 8:30 am GMT. The construction PMI is expected to print a reading of 58.0, slightly lower than the previous month's reading of 58.2. Meanwhile, the number of mortgage loans approved in April is forecasted to be at 49,000, just a tad higher than the 47,000 figure seen in March. If these reports come in better than expected, we may see another round of pound buying take place.

Credit information will also be released at 8:30 am GMT, as the Bank of England will be releasing net lending to individual figures. About 1.1 billion GBP worth of new credit is predicted to have been lent out to consumers in April, up from the 0.6 billion GBP lent out in March. A better than expected figure would reflect improving credit conditions.

[PipDiddy]

The Cable went into see-saw mode yesterday as it paced in and out of the 1.4700 psychological handle. It rallied as high as 1.4771 during the Asian session before completely reversing its gains to settle at 1.4665 by the end of the US trading session. The Guppy, however, was well bid, which enabled it to soar to 135.02 by the day’s end.

Data released turned out to be insignificant to traders as they hardly had any effect on price action. Nevertheless, here’s a quick recap of the results.... The construction purchasing managers’ index printed a reading of 58.5, slightly higher than forecast. Meanwhile, the figure on mortgage loans approved was 49.87K, which was also higher than the 49.8K consensus.

Looking forward, now that the buying frenzy that stemmed from the AIG-Prudential deal has faded, it looks like the pound will be very vulnerable to selling pressures. If the data later comes in below, we may see a sharp sell-off in the pound. The first report, the Nationwide house price index, will be published at 6:00 am GMT. It is predicted to show an increase of 0.5%. The second one UK’s services purchasing mangers’ index. It will come out at 8:30 pm GMT and is expected to print a reading of 55.6.

[PipDiddy]

Even though UK's economic data came in line with expectations, the cable was unable to make further headway as it retreated towards the 1.4600 area. Meanwhile, the guppy was unable to sustain its rally above 136.00 and pulled back to a low of 134.56.

UK's services PMI stepped up a notch from 55.3 to 55.4 in May, signaling that the services sector expanded at a slightly faster pace during the month. However, components of the index revealed that firms started cutting jobs again. It turns out that employers grew increasingly worried about the stability of the UK economy, which is still adjusting to the new coalition government. On top of that, firms were wary that the UK government's plans to reduce its public deficit could have a negative impact on their profits.

Meanwhile, Nationwide's survey showed that house prices climbed by 0.5% in May, less than half the 1.1% increase seen in April. Despite this uptick in house prices, activity in the housing market remains subdued. The release of the Halifax house price index today at 8:00 am GMT could provide more details on the state of the UK housing industry. A rebound of 0.3% is expected for the month of May and a stronger than expected result could provide the pound some support.

Also, keep an eye out for the release of the US non-farm payrolls report at 12:30 pm GMT, bearing in mind how much of a ruckus this could cause in the markets. Be careful out there!