Daily Economic Commentary: United Kingdom

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Daily Economic Round Up of data from the United Kingdom!

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The pound rallied nicely yesterday as poor economic data that came out. Traders just shrugged off the big drop in net lending to individuals for May. It reported that lending was only 600 million pounds and not 1.3 billion like initially expected. Mortgage approvals were the same as May’s figure at 43,000, slightly lower than forecast.

UK’s economic cupboard is packed for today. First up at 6 am GMT is Nationwide’s house price index. A 0.4% in house price is expected. Following at 8:30 am GMT is the current account balance. A 6.5 billion pound deficit will most likely print. Finally, there’s the UK GDP which will be released at the same time. Preliminary results showed that UK’s economy shrank 1.9% but economists are saying that it should be much worse. The final report on GDP is predicted to show a 2% contraction.

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The GBP plummeted yesterday after weak economic numbers were presented. Initially, the GBP/USD broke its upper daily ATR upon the release of the housing price index, which saw a 0.9% increase against the 0.4% forecasted decline. However, gloomy numbers began to pour in, starting with the current account.

UK’s current deficit was expected to narrow from 8.8 billion to 6.5 billion GBP. Instead it posted a very marginal decrease to 8.5 billion GBP. The GBP took a punch in the gut after its first quarter GDP was revised downward from -1.9% to -2.4%. A downward revision was already foreseen but it wasn’t expected to go below 2.0%. Lastly, business investment reported a decline of 7.6% for the quarter, worse than the expected 5.5% drop.

Could the GBP be eyeing a recovery from yesterday’s price drop? The UK’s manufacturing PMI could be the saving grace for the GBP if it rises from 45.4 to 46.4 as expected. The actual number is due at 4:30am GMT today.

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Despite stronger-than-expected manufacturing PMI, the GBP found some difficulty extending its gains against the USD. Manufacturing sector PMI rose from 45.4 to 47.0, its highest level since May 2008. The reading still lingers in the contractionary territory but is slowly crawling its way to expansionary levels above 50.0.

Construction PMI is due for release 9:30am GMT today. If an improvement from 45.9 to the expected 46.1 reading is seen, then the GBP could resume its rally and pierce past 1.6500 again. Comments from BOE Monetary Policy Committee members Timothy Besley and David Miles, who are both scheduled to deliver their speeches today, could provide some reassurance to the British economy.

Also, BOE is set to release the results of its Credit Conditions Survey today. Current credit conditions for the past three months may have been on the tight end as the nation’s political ruckus threatened economic stability. Meanwhile, future credit conditions could remain rigid since the recent downward revision of UK’s GDP casts a dark cloud over spending and financial confidence.

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Last night’s USD sell-off didn’t do much to buoy the GBP as it still found itself at the short side of the pair to close the day. The GBP tripped and slid pretty much across the board during the Euro session. If there’s any consolation, it saw itself mixed against the other major currency players when the US trading session’s clock ticked to zero.

In a statement made by External BOE MPC Member Timothy Besley, he said that it was too soon for the BOE to determine if the £125 billion debt purchases was giving a hand in the economy’s recovery and pulling it out of deflation. Some market participants are concerned that the combination low interest rates (0.5%) and QE program would drive future inflation way above the bank’s target. The bank’s target inflation rate is pegged close to 2.0%. The latest CPI reading for the UK is already at 2.2%. The current financial situation in the UK is still at disarray which is causing the BOE to sit on its lap in the mean time.

On a separate note, the BOE is expecting the British banks to increase their lending security given the UK’s unhealthy financial conditions. Covenants would be stricter to borrowers. This certainty would not help the market in terms of liquidity since it would be more difficult for firms to borrow money.

Lastly, the UK’s construction PMI for the month of June surprisingly fell to 44.5 from the last period’s 45.9 reading. The index was even widely anticipated to grow to 46.1. The index assesses the business conditions in the UK’s construction sector. The unexpected drop in the index has further strengthened the concerns (-) regarding the UK’s economy.

Today (8:30 am GMT), the UK’s services PMI will be reported. The index is expected to rise to 51.8 from 51.7. However, with yesterday’s unexpected drop in manufacturing PMI, we might see a similar outcome in the services account. How? A slack in activity in the manufacturing sector may lead to a similar slack in the activity of their service providers like the banks who do their financials, consultancies, and the like.

The GBP may weaken further if indeed the services PMI comes in with a negative change.

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The usual volatility of the GBP was nowhere to be found last Friday as US celebrated its long Fourth of July weekend. The GBP just traded in a relatively tight 120 pip range.

Data that came out of UK was mixed. Its services purchasing managers’ index printed 51.6, slightly off track from the 51.8 expectation. The survey basically measures the sentiment businesses involved in the service industry by using a 0-100 optimistic/pessimistic scale. A reading above 50 means there are more optimists that pessimists. Still, this is certainly an improvement. Before June, the reading has been consistently in pessimistic territory for 12 consecutive months.

No economic data to be released today but looking ahead, we’ve got the official bank rate decision on Thursday. Again, like any interest rate decision, this would most likely cause quite a stir in the foreign exchange market. With the country’s benchmark interest rates close to nil at 0.50%, the bank really has nowhere to go but up. Of course, given the country’s current economic situation, that scenario is highly unlikely. What traders will be watching out for is the accompanying statement. This means that they’ll be looking out for any expansion of quantitative easing measures or any downgrade (or upgrade) in the bank’s outlook of the economy.

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Volatility returned for the pound, as it got pounded yesterday during the European session... before recuperating much of its losses during the US session! The GBPUSD pair hit a new monthly low at 1.6100 before moving back up to close just below 1.6300!

No economic reports were released yesterday in the UK.

Today will be much busier, as a slew of economic reports are scheduled for release. At 8:30 am GMT, the Manufacturing Production and Industrial Production m/m reports are expected to show that production has increased slightly, by .1% and .2% respectively, during the month of May. Later in the day, at 11:01 pm GMT, the Nationwide Consumer Confidence index is expected. The index is forecasted to show increased consumer confidence and to have a reading of 55, a rise from May’s reading of 53.

As noted yesterday, the Bank of England will also be releasing its interest rate statement on Thursday. Traders will be looking forward to the accompanying statement, as it may reveal shifts in the bank’s outlook or an expansion (or contraction) of current monetary policies in place.

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The GBP dropped like a rock yesterday as weak economic data dragged the GBP/USD closer to the 1.6000 mark. Manufacturing production recorded a 0.5% slump, against the expected 0.1% uptick. Industrial production was down by 0.6% even when economists expected a 0.2% increase.

On a brighter note, the GDP estimate, which is reported by the National Institute of Social and Economic Research or NIESR, forecasts that economic activity will shrink by 0.4% in the second quarter of the year after contracting by 1.3% in the first quarter. Additionally, NIESR noted that the economy is "stagnating" instead of contracting. This may support the call for further quantitative easing when the BOE meets this Thursday. If the central bank does expand its quantitative easing efforts, then we may see the GBP/USD reach or even pierce below the 1.6000 handle.

For today, Nationwide consumer confidence was just reported to have climbed from 54 to 58, beating the consensus at 55. This implies that consumers are hopeful that, despite the recent downturn in production, the economic situation in the next six months will improve. Halifax housing price index is due at 9:00am GMT. House prices are projected to hold steady in June, after posting a 2.6% increase in May.

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The GBP once again found itself at the losing end against all the currency pairs excluding the NZD. Apparently, the NZD had a more terrible day than the GBP. The currency just sailed southwards versus safe-haven currencies such as the USD and JPY during the mid-part of the US trading session.

The Halifax House Price Index (HPI) surprisingly fell by 0.5% in June after rising by 2.6% in the month prior. The index was expected to come in flat at 0.0%. HPI measures the change in the price of homes that are financed by the Halifax Bank of Scotland (HBOS). While there are some encouraging signs of economic improvement recently in the UK, the rising unemployment continues to put a drag on UK’s recovery. As more and more people lose their jobs, more people are having difficulty with buying a house. The drop in the HPI moved the average house price in the UK down to £157,713.

The highlight of today in the UK would be Bank of England’s interest rate decision at 11:00 am GMT. The BOE is expected to expand its £125 billion quantitative easing program while maintaining the target interest rate at 0.5%. Any expansion in the program would further hurt the GBP because of dilution.

Before the bank’s decision, UK’ trade balance in May will likewise be released. UK’s trade deficit is expected to have narrowed to -£6.8 billion from -£7.0 billion. The report is due at 8:30 am GMT.

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The GBP surged to new weekly highs yesterday as the Bank of England chose to refrain from changing interest rates and expanding its quantitative easing measures. It opened just a few pips shy of 1.6100 and rallied almost 300 pips towards the 1.6380 price region by the end of the US session. Still, the question that must be asked is whether the sharp rise was merely a bullish correction from the recent dollar strength or a true shift in sentiment.

Economic data that came out of UK also supported the pound. The country’s trade balance for May printed a 6.3 billion GBP deficit, a little better than the 6.8 billion GBP deficit initially expected. This was also an improvement from the month prior. The leading index for the same month also sang the same positive tune. It improved to 1% from April’s revised down figure of 0.7%, indicating that the economic outlook for UK has brightened slightly.

We’ve got the June producer price index for both input and output today at 8:30 am GMT. The PPI input report, which is predicted to show a 0.8% increase, basically records the average monthly change in the price of goods and raw materials purchased by manufacturers. The PPI output, on the other hand, measures the change in price of goods sold by manufacturers. The PPI output is expected to show a 0.3% rise. The thing about both these reports is that they tend to provide a good outlook for the country’s inflation. You see, when businesses pay a higher price for their raw materials, they pass the additional costs they incur to their customers.