Daily Economic Commentary: United Kingdom

[ForexGump]

The pound is striking back! Friday marked the 3rd consecutive day of impressive gains for the GBP, as it had been dropping the previous couple of weeks. The pair ended trading at 1.6399, after touching as low as 1.6114 in trading during the week. Is this merely a retracement? Or is this the beginning of a new trend?

Over the weekend, the British Chambers of Commerce reported that they expect the UK economy to contract by 4.3% by the end of the this year, and to grow by 1.1% in 2010. The BCC also said that unemployment can reach as high as 9.7% by mid-2010 and that a chance of a relapse is possible. Chief economist David Kern said that the economy has been too reliant on government stimulus and that the UK’s international credit standing could be threatened unless the UK government does something about it. With this in mind, will this prevent the Bank of England from expanding its quantitative easing plans? Take note, the BOE will be releasing its interest rate decision later this week.

We also saw some arguments on the political level as Chancellor Alistair Darling refused to back up Prime Minister Gordon Brown’s claim that his economic stimulus plans have “saved 500,000” jobs. Could more rumblings within the week trigger political turmoil? If it does, we all know what this could lead to – another GBP sell-off!

At 11:01 pm GMT, BRC Retail Sales and RICS Housing Price Balance reports are due. The latter report is expected to show that housing prices are close to stabilizing, with few reporting a decrease in home prices in their area.

This could be a make or break week for the GBP, with some high impact reports on deck. This week, the Halifax HPI m/m, Manufacturing Production m/m and Producer Price Index reports are all scheduled for release.

[ForexGump]

It looks like the pound is off to a bad start. It was the weakest among the majors yesterday as it struggled to hold on to its gains and failed miserably. The GBPUSD was unable to sustain its rally past the 1.6400 mark while the GBPJPY slid below the 152.00 level. With a bunch of economic reports due today, the pound has several chances to get back on its feet.

Only the BRC retail sales monitor was released yesterday and this report seemed to have minimal impact on the pound's price action. The report showed that same-store sales at the retail level declined by 0.1% in August after posting an impressive 1.8% increase in July.

Today's itinerary is filled with manufacturing production figures, NIESR GDP estimate, and Nationwide consumer confidence data. After coming up with a surprise 0.8% increase last month, manufacturing production is expected to continue advancing, this time with a 0.3% rise. The actual figure is due at 8:30 am GMT.

The National Institute of Economic and Social Research will release its GDP estimate at 2:00 pm GMT. For the past couple of months, their estimate was a 0.4% contraction. If their estimate for August shows the slightest bit of improvement, then the pound could pocket in a few gains.

Lastly, Nationwide's gauge of consumer confidence is set for release at 11:00 pm GMT. The index has been increasing since May, coming up with a positive surprise each month. For August, the index is projected to climb from 60 to 62.

[ForexGump]

Zoom! The pound ran over the greenback during the euro session after the UK posted some impressive manufacturing and industrial production numbers in July. The cable surged by at most 230 pips. It, however, encountered resistance at the 1.6500 handle.

UK’s manufacturing production for the month of July swung high by 0.9% against expectations for only a 0.3% increase. Its previous figure was also positively revised to 0.6% from 0.4%. The country’s industrial output likewise surpassed the initial estimates as it posted a 0.5% gain. The consensus was only 0.3%. Its previous number was likewise revised to 0.6% from 0.5%. The government’s version of a “cash-for-clunkers” program is said to have an impact in the figures’ rise. The increase in manufacturing and industrial output tallies up further proof that UK’s economy may have ceased contracting during the third quarter.

The GBP skyrocketed against the USD following the release.

Meanwhile, according to NIESR, UK’s economy has already stopped contracting. The index posted a 0.2% gain after declining by -0.3% in the previous period. Its previous reading was also positively changed from -0.4%. The GBP got some lift following the report.

Earlier today, UK’s Nationwide Consumer Confidence in August improved to 63 from 61. It was only seen to reach 62. The advance in the index can be attributed to the recent positive economic data which indicate that the economy is already lifting its foot out of its worst recession since WWII.

Today (8:30 am GMT), UK’s trade balance will be reported. UK’s trade deficit is projected to shrink to -£6.3 billion from -£6.5 billion. We may be up to another better-than-expected result given the gains in the manufacturing and industrial output covering the same period. Such could be beneficial for the GBP.

[ForexGump]

The pound decided to give the dollar a break yesterday after Tuesday’s extreme one-directional moves. The GBPUSD pair opened Asia at 1.6500 and closed the US trading session at 1.6530. That’s a pretty tight move considering the pair moves almost 200 pips per day.

This kind of price action probably wouldn’t persist today given the amount of event risk on UK’s economic calendar.

Firstly, there’s the Halifax house price index for August at 8 am GMT. The Halifax HPI measures the monthly percentage change of house prices by using their own mortgage lending. Rising house prices usually indicate increased economic activity so investors tend to see the report as a leading indicator of economic health. If house prices increase, businessmen are encouraged to invest in the housing industry, which, in turn, stimulates the economy. House prices are expected to have risen by 1% in August.

At 11 am GMT, expect to hear the Bank of England’s announcement regarding the country’s benchmark interest rates. Economists predict the BoE to keep rates steady and hold of any further expansion of their quantitative easing program. In the bank’s previous announcement, the bank kept interest rates unchanged at 0.50% but surprised traders by expanding their quantitative easing program by another 50 billion pounds. This nudged up the amount of money committed to quantitative easing by the bank to 175 billion pounds. If we see another surprise action by the BoE, we might see the pound drop down again.

Both reports tend to be a big deal among traders so watch out for volatility spikes during the release. If you can’t handle too much unpredictability, it’d probably be best to stay on the sidelines for today.

[ForexGump]

The pound continued its hard hitting ways against the USD, busting past resistance at 1.6600. The pair closed trading at 1.6667. I suspect that traders and investors reacted positively to the Bank of England rate decision, which helped boost the pound.

The BOE decided to keep both its interest rate and quantitative easing measures at current levels yesterday. The base rate stands at 0.50%, as it has for the past 6 months, while the asset purchase program amounts to 175 billion pounds. While the BOE noted that there have been signs of recovery, I think that the bank still remains cautious, given the shaky state that the British economy is in. In fact, there have been whispers that Governor Mervyn King and other MPC members still want to expand quantitative easing measures. Remember, in their last meeting, the program was expanded by 50 billion pounds, although King wanted an expansion of 75 billion pounds. So, if we still see some signs of weakness over the next couple of months, I wouldn’t be surprised to see another expansion of the program...

Also released yesterday was the Halifax HPI m/m report. The report printed that housing prices rose for the 2nd consecutive month, as prices rose by 0.8% in August. This follows a 1.2% rise in July, although it was slightly less than expectations of a 1.0% rise. It seems that people are taking advantage of low interest rates and are looking to purchase homes at affordable levels.

Today should be a little less noisy, with only the PPI Input report of any significance. The report will be released at 8:30 am GMT and is expected to print that prices of goods and raw materials rose by 0.9% in the past month. Take note that this data is indicator of consumer inflation – if it comes out much worse than expected, we could see deflation fears spark up again, which may cause the GBP to falter.

With traders closing their books and the pound rallying impressively, I’d be on the lookout for some profit taking as we end the week. Enjoy your weekend!

[ForexGump]

Is GBP strength in the cards for yet another week? The GBP rally seemed to have lost steam last Friday as the GBPUSD moved sideways while the GBPJPY tumbled down. The GBP is looking at a big week ahead so the price action should be pretty exciting as well.

The UK economic calendar starts off with the RICS house price balance due at 11:00 pm GMT today. After 8.1% of surveyors reported a house price decrease in their area in July, only 0.1% are expected to post price declines for August. This report should have a mild impact on the GBP but, being the only economic report on today's docket, a better-than-expected figure could provide a strong boost for the GBP.

On Tuesday, we'll take a look at UK's inflation data as it releases CPI, core CPI, retail price index, and housing price index. The CPI reading for August is expected to climb 0.3%, bringing the annualized reading to only 1.4%. This is way below the central bank's target of 2% inflation. This is also dangerously close to the bottom of the central bank's acceptable inflation range of 1% to 3%, which means that if the actual figure fails to meet the consensus then the GBP is in big trouble.

Employment data takes the limelight on Wednesday. Claimant count change, average earnings index, and unemployment rate are set for release at 8:30 am GMT that day. Around 25K in jobless claims are expected for the month of August, which marks the indicator's 18th consecutive monthly rise. This could bring the unemployment rate from 7.8% to 8.0% - another bad news for the GBP.

Come Thursday, we take a look at consumer data as UK reports its retail sales and consumer inflation expectations. Then on Friday, the GBP would take cue from UK public sector net borrowing data.

[ForexGump]

The Sterling found itself pounded by the safe-havens as both USD and JPY edged higher in Monday’s trading. Anxiety over a trade war between the US and China boosted safe-havens against the higher yielding assets like the GBP.

The apprehension between US and China started last Friday when President Barack imposed an additional 35% tariff on tires coming from China. China, on the other hand, accused the US of protectionism. The US and China are two of the most biggest economies in the world and not having a middle ground between the two could have a negative impact on both countries. Having said that, the two will likely reconcile and iron out their differences in the foreseeable future.

The RICS house price balance reported a surprise upside for August as 10.7% of surveyors posted price increase in their respective areas. The consensus was that 0.1% of surveyors would report price declines in their areas while the previous month saw 5.7% of surveyors posting price declines.

We could be in for a lot of action during the Euro session. CPI, RPI, and inflation reports hearings will be on tap today. CPI is seen to slow to 1.4% from 1.8% while the RPI is likewise estimated to worsen to -1.5% from -1.4%. With both accounts projected to abate, the sterling could lose some of its lift.

[ForexGump]

The pound sold-off like hotcakes in yesterday’s trading session as Governor Mervyn King mentioned that the Bank of England might lower the rate it pays to hold reserves for commercial banks. The GBPUSD pair was trading at 1.6640 prior the comment and went as low as 1.6403 as the trading session rolled along. Just in case you like counting, that's a 238 pip drop!

According to King, it is a move they are "looking at" to enable more money to flow back into the economy. The comment sent the pound crashing down against most major currencies despite better-than-expected numbers on economic data released moments before.

The August consumer price index (CPI) printed 1.6%, higher than the 1.4% forecast. The CPI measures the average percentage change in price of goods and services commonly purchased by consumers. The retail price index, which counts mortgage expenses and home costs, also showed improvement. The index printed -1.3%,which was better than the -1.5% consensus.

Coming up at 8:30 am GMT today are data about UK’s labor market. Economists predict that 24,700 people claimed jobless insurance in August. In addition, they said that employee earnings probably rose 2.1% while UK’s unemployment rate hit 8% in September. If these figures come out worse-than-expected, investors could continue selling-off the pound versus other major currencies...

[ForexGump]

Mixed trading for the cable yesterday, as it traded punches with the USD and left the trading round even. The GBPUSD closed near its opening, finishing the day at 1.6503 – just two pips higher than its opening! With the relative up and down movement yesterday and another set of data due later, what’s in store for the GBP today?

Reports yesterday indicated that UK unemployment has reached its highest levels since 1996. The unemployment rate currently stands at 7.9%. The reports also indicated that the number of people filing for unemployment benefits rose by 24,400, bringing the total figure to 1.61 million people. Some economists fear that even when government stimulus plans end, the economy will continue to feel the effects of unemployment. Take note, that unemployment figures are lagging indicators, meaning that there could room for it to keep increasing. Some say that it could peak around the middle of next year...

If this does keep up, I wouldn’t be surprised if we see more action from the Bank of England regarding monetary policy. Last month, some members of the BOE (including Governor Mervyn King) actually wanted a larger expansion of the BOE’s asset purchase program. Will this issue be brought up in future meetings?

At 8:30 am GMT, retail sales data is due. It is expected that sales rose by 0.2% from July to August. Later on at 10:30 am GMT, the CBI industrial orders expectation report – a survey that measures manufacturer’s thoughts on the economy – will be released. The report is expected to print a reading of -49, an improvement from the August’s reading of -54 but still far off from the 0 mark that indicates whether orders are increasing or decreasing.

In any case, I’d be careful trading the pound, as it has been acting differently from other “high-yielders” these past couple of weeks. Right now, it has a mind of it's own - it must be the tea...

[ForexGump]

So far, things are not looking so bright for the pound, with BOE Governor King's weak outlook for the UK economy and the central bank's intention of lowering their deposit rate. And after struggling to recover its losses this week, the pound got slammed by another disappointing economic report yesterday.

After posting a 0.2% increase in July, retail sales turned flat in August. Components of the indicator show that consumers spent less on clothing for the month. The weak UK labor market was pinpointed to be the culprit for the slump in consumer spending.

Meanwhile, consumer inflation expectations stood at 2.4% for the third quarter, same as in the previous quarter. Regarding the future level of interest rates, 48% of respondents expect rates to rise in the next 12 months. If the UK joins the rest of the nations that have made it out of the recession, then maybe we'll see a rate hike sooner or later...

For today, we have public sector net borrowing data on tap. This indicator reflects the amount of money the government borrows from the public. Net borrowing is expected to rise from 8 billion GBP to 17.9 billion, marking the sixth month in budget deficits. If the actual figure posts a higher deficit than the consensus, then the chances of the pound making some gains are very slim.