Daily Economic Commentary: United Kingdom

[ForexGump]

Aston Martin’s GBP shifted its gear higher and raced past the new Nissan Skyline JPY and Chevrolet’s Camaro USD in last week’s 5-day endurance tournament. It was still, however, the BMW’s EUR coupe that took the checkered flag from the Aston Martin to finish ahead of the other racers.

The GBP made a crucial mistake during the final lap of the heat staged last Friday when its GDP for the second quarter continued to slide by 0.8% after already falling by 2.4% previously. The consensus was only for a 0.3% contraction. The culprit? Rising unemployment, wage freezes, negative equity, expensive and rationed credit remains to be the sludge in the GBP’s engine. Such resulted to a 0.7% drop in industrial production, 2.2% slide in construction output, and a 0.6% contraction in the service sector.

Monday’s leg will be held not in the UK but in the US. New homes sales in the US for the month of June, which is expected to have risen to 354,000 from 342,000, will be a key driver for Aston Martin’s GBP. A rise in the figure or at least anticipation of such can give GBP a boost.

[ForexGump]

The light economic calendar pretty much kept the GBP’s price action range bound all throughout yesterday’s trading session. It closed the US session just a few pips shy of 1.6500 from its 1.6470 Asian open.

The Confederation of British Industry is scheduled to release its distributive trades survey for July today at 10 am GMT. The survey basically measures whether retail and wholesale companies believe that sales volume are expanding or contracting for the reporting month. Since sales volumes of businesses are directly affected by consumer purchases, the distributive trades survey serves as a good leading indicator for consumer spending. Economists expect the survey to print -12, which is an improvement from June’s -17. The reading is still in the negative territory indicating that sales volume is lower.

The possibility of the report printing an upside surprise seems to be in the cards though. Just last week the report on retail sales for the month of June showed that sales jumped 1.2%, almost three times the expect 0.4% rise. Will the distributive sales survey follow suit?

[ForexGump]

More range bound motion for the pound yesterday, which lost slightly against the USD as the dollar generally gained across the board. The GBPUSD pair closed slightly lower at 1.6439. Still, the pair cant seem to break past the 1.6400. Will today’s action lead to break out of the consolidation area between 1.6550 and 1.6400?

A report released by the Confederation of British Industry showed that a majority of UK retailers reported that sales have fallen from a year ago. 47% said that sales fell, while only 32% reported higher sales, leaving a balance of -15. This was slightly worse than the expected -12 difference. Retailers expect conditions to worsen slightly for August, as unemployment is hurting consumer spending.

Later today, the monthly Net Lending to Individuals is expected to show that lenders are more wiling to give out loans as debt is expected to increase from £600 million to $900 million. The report is due at 8:30 am GMT. Also due at that time is the mortgage approvals report. It is forecasted that 48,000 new mortgages were approved in June.

Tomorrow, higher impact reports will be released in the Nationwide HPI and GFK Consumer Confidence reports. The first report (due at 6:00 am GMT) is forecasted to indicate that housing prices rose by 0.3% in the past month, marking the third straight month of increase. The latter report expects to reveal that British consumer confidence picked up slightly in July, with the index rising from -25 to -23.

[ForexGump]

UK economic data acted as a buffer preventing a sharp drop in the GBP/USD amidst the USD rally yesterday. Risk aversion may have pumped up the demand for safe-haven currencies but the GBP/USD held on to the 1.6400 handle while the GBP/JPY stayed above 154.00.

Net lending to individuals missed expectations as it stepped down from 0.5 billion GBP to 0.4 billion GBP. Meanwhile, mortgage approvals rose by 48K GBP, exactly as expected. These figures came in line with the BOE's lending report, which showed an improvement in mortgage lending but that consumers and businesses continue to face challenges in securing funds.

Up ahead, Nationwide is expected to print a 0.3% increase in house prices for July. House prices were up by 0.9% in June. Since the real estate sector is one of the key areas of the UK economy, this report could have a strong impact on the price action of the GBP. The report is due at 6:00 am GMT.

Later on, the GfK consumer confidence reading will be released. The index is expected to post a modest improvement from -25 to -23, indicating that the British still remain pessimistic about the economic outlook. Nonetheless, consumer confidence has been slowly improving in the past few months. The GBP could draw some strength if the actual figure, which is due at 11:00 pm GMT, beats expectations.

[ForexGump]

The GBP took yesterday’s round on points as it closed positively against the other major currencies. The Sterling sprung back after getting beat for the past couple of days. All it needed was a bottle of “Risk Appetite (TM).”

The GBP drew some energy from the better-than-expected UK Nationwide HPI report. House prices in the UK for the month of July surprisingly rose by 1.3% to £158,871 against the initial estimate for only a 0.3% gain. The recent result marks its third consecutive monthly rise after posting a 1.0% advance in the month prior. The lack of supply helped screen the UK’s housing market from the current financial slump. The positive result adds to signs that UK’s housing market may be recovering.

UK’s GfK consumer confidence held at its highest level since April 2008 at -25. Confidence, as measured by the index, was pegged at -39 from a year earlier. The report further supports that the worst slump in this generation for the UK is basing. Having no improvements in the index, however, indicates that consumers remain a little cautious about the market.

No economic reports are due in the UK today. In the US, the advance GDP report for the second quarter is, however, scheduled for release at 12:30 pm GMT. The US economy’s pace of contraction is expected to slow to -1.4% from -5.5%. We might see a surprise upside in the report given the unexpected strength that the US housing market showed. Such could then support the rise of higher yielding assets like the GBP.

[ForexGump]

Fuelled by risk appetite, the GBP flew more than 250 pips against the USD in last Friday’s US afternoon trading session. Risk appetite has been the dominating market sentiment for three straight weeks now, much to the benefit of the GBP. Will the prospect of global recovery continue to push the GBP to a new yearly high or will the GBP eventually land flat on its back?

United Kingdom’s July manufacturing purchasing managers’ index is due today at 8 am GMT. It measures the overall sentiment of businesses towards the economy by asking them to rate conditions in the manufacturing industry by using a 0-100 scale. A reading higher than base line 50 means there is industry expansion. The forecast currently stands at 47.7. If it holds, it would be an improvement from June’s 47.0.

Looking further ahead the week, the Bank of England is set to announce its benchmark interest rate decision on Thursday. Since the interest rate currently stands at an all-time low of 0.5%, a cut would be highly unlikely as it would undermine the currency. What traders will be focused on is the accompanying statement and whether an expansion of the country’s quantitative easing efforts is in the cards.

Given how the GBP pierced through 1.6700 last Friday, the question that begs to be asked now is: Was this merely a temporary break or will buyers push the GBP even higher?

[ForexGump]

The pound flew up the charts like a Beatles’ single yesterday, posting its third consecutive day of big gains versus the dollar. The pair broke out to set a new yearly high at 1.6987 before closing at 1.6940, its highest close since October last year!

It seems like the GBP got a nice boost from the Manufacturing PMI report, which posted a reading of 50.8 for the month of July. This was better than the expected score of 47.7 and marked the first time in 16 months that the index had a reading above 50 – the score that separates expansion and contraction. It appears that activity has picked up as companies are no longer slashing inventory levels at the pace that they were a few months ago.

The GBP also benefited from good earnings data from HSBC Holdings, as well as overall dollar weakness. As long as traders and investors keep focusing on the good news that has been released, I think we will continue to see this recent uptrend to continue.

The pound may find more fuel to burn later when the Construction PMI and Nationwide Consumer Confidence reports come out at 8:30 am GMT and 11:01 pm GMT respectively. Both reports are expected to show some improvements from previous readings, so I think we could see buyers giddy and waiting for their releases.

Tomorrow, more high impact news is due, as the Halifax HPI m/m, Manufacturing and Industrial Production m/m and Services PMI reports all coming out at 8:30 am GMT. All reports are expected to show some improvements, but I wouldn’t be surprised to see slightly better than expected data, especially from the production reports, given the recent data that has been released. Watch out for more big swings and strong moves if buyers continue to dominate the market.

[ForexGump]

Price movement in the GBP pairs took a breather after the Cable's 590-pip dash in the past few days. Despite the notable improvements in construction PMI and Nationwide consumer confidence index, consolidation was the theme for GBP pairs yesterday.

Activity in the construction sector showed a huge improvement as construction PMI climbed from 44.5 to 47.0. This surpassed economists' expectations at 46.0. This marked the slowest pace of contraction in the last sixteen months. The report also noted that the 12-month outlook for the sector is now more upbeat than ever, reaching its highest level in more than two years.

Consumer confidence also recorded an uptick as the corresponding index stepped up from 59 to 60. Analysts expected the index to stay at the previous month's reading of 59. The rise is attributed to an stabilizing housing market and a recovering manufacturing sector.

Economic news for today could spur a little more excitement in the price action. A gauge of house prices is due at 6:00 am GMT. House prices are expected to be up by 0.7% after posting a 0.5% decline in the previous month. Meanwhile, manufacturing production is projected to hold steady in June after a 0.5% downturn in May. The actual figure is due at 8:30 am GMT. Along with this, services PMI, which is eyeing the 51.9 mark, will be released. The index stands at 51.6 and a significant improvement could boost the GBP.

[ForexGump]

Again, the Sterling managed to move higher against the USD and the JPY in yesterday’s trading. Fueled by positive UK fundamentals, the GBP spiraled up during the Euro session. Its gains were, however, cut short as investors showed some tentativeness during the US session.

The GBP stepped on a higher gear when UK’s Halifax HPI, services PMI, and manufacturing production showed better-than-expected results. The prices of homes as measured by the Halifax index surprisingly jumped by 1.1% in July against expectations for only a 0.7% increase. Prices fell by 0.5% during the month prior. The advance in the account indicates that demand for houses in July has increased. UK’s manufacturing output also unexpectedly gained by 0.4% in June after falling by 0.6% in May as factories increased production of cars and computers. Lastly, UK’s services PMI beat the initial estimate of 51.9 as well. It came in at 53.2 from the previous reading of 51.6. The improvements in the mentioned accounts add further evidence that UK’s economy is recovering.

Today (11:00 am GMT), the Bank of England will decide on its target interest rate. Market participants expect the bank to leave the rate unchanged at 0.50%. The bank is also expected to resolve whether it will continue or stop its asset-buying program. Last May, the bank purchased bonds amounting to £125 billion as the economy deteriorated. As the economy recovers, the bank may still extend the program to sustain its upswing. However, some economists believe that the bank may halt the program given the positive developments in the economy. The GBP will be negatively affected if the bank extends the program. On the hand, the GBP could rise should the bank hit the ‘pause button.’

[ForexGump]

The GBP got slaughtered across the boards yesterday as the Bank of England decided to expand its quantitative easing measures by another 50 million pounds. This puts the total cost of the program to 174 billion pounds. The damage on the GBP was huge. Minutes following the announcement, the GBP fell 150 pips against the USD. It didn’t end there though as it dropped down another 80 pips when the US session started.

The bank says the reason behind the move was because the effect of the recession on the country was much deeper than it initially expected. Interest rates are left untouched at 0.5% though. It seems like rising unemployment and deflation are weighing heavily on Monetary Policy Committee.

Later, expect to see the July producer price index input at 8:30 pm GMT. It measures the average change of goods and raw materials bought by manufacturers month-on-month. Purchase prices probably dropped by 0.8%, economists predicted.

As of this writing, the GBP/USD spot rate stands at 1.6785 and it makes me wonder whether traders have overshot the GBP’s value. Risk appetite has taken the currency all the way to new yearly highs under the perception of global economic differently but the bank looks like it sees things, given its decision to expand its quantitative easing. Because of this unexpected development, is the GBP poised for more losses or will traders just see this opportunity to “buy the dip”?