Daily Economic Commentary: United Kingdom

[PipDiddy]

Ripppp! Cable got torn in yesterday’s action, as traders sold the pound on some comments made by the Bank of England. The GBPUSD pair fell almost 200 pips, falling all the way down to 1.6566.

BOE Governor Mervyn King made some interesting comments yesterday, saying that the BOE was keeping its options open on more economic stimulus. Speaking after the quarterly inflation reports, King said that the economy was not yet ready to have any stimulus withdrawn at this point. He also implied that a weaker pound would benefit the UK economy.

The recent inflation reports also indicated that inflation will remain below the bank’s 2% target for a long time, while revising up their forecasts for 3rd quarter growth. The BOE now predicts that the economy will grow by 3.75%, up from the 2.5% forecast in May.

Still, traders focused on King’s comments, which led to the pound’s demise. I wouldn’t be surprised if somebody told me that there were some members – possibly including King himself – who actually pushed for more stimulus in their last monetary policy meeting. Take note that in that meeting, the MPC decided to expand the asset purchase program by £25 billion, bringing the total to £200 billion. That being said, I’ll be keeping an eye out for the next MPC meeting to see if more stimulus is injected into the UK economy. Could pound weakness continue in coming weeks? We’ll have to wait and see...

This news dominated the markets, as the pound found no support despite some data that showed that the UK unemployment rate fell to 7.8% in September, which was better than forecast of the rate being at 8.0%. Other data also showed that unemployment claims came in better than expected, rising just 12,900, much less than the expected 20,200 figure, marking the slowest increase in claims in over a year.

Trading over the next couple of days may not provide as much fireworks, as no high impact data will be released from England over the rest of the week. Still, be careful today as the US comes back from it’s mid week holiday.

[PipDiddy]

Hmp! The pound turned a cold shoulder to the USD rally yesterday as the GBPUSD stayed holed up in a tight range. Even with no UK economic reports on Thursday's docket, the GBPJPY managed to close higher at the end of the day.

No economic reports are due from the UK in the next 24 hours. Would we see more consolidation for the GBPUSD? Maybe. Traders could be sitting on the sidelines, awaiting the next set of major reports due from the UK next week, thus resulting to the GBPUSD's inaction.

Still, we might see a little more excitement later on as the US releases its trade balance data. This report, which is the only high-impact release on today's US economic schedule, could show that the US trade deficit widened from $30.7 billion to $31.8 billion in September. Watch out for sudden shifts in risk sentiment, especially if the actual figure misses the mark!

[PipDiddy]

The pound edged the dollar in last Friday’s trading. The cable went as high as 1.6707 before closing at 1.6694.

With no economic catalyst at hand in the UK last Friday , the GBP still managed to close positively against the USD. The possible reason could be the 0.4% growth in the euro zone’s economy. Despite coming in slightly lower than expected, it was the first time that the euro zone posted a positive growth since the start of the recession. The UK and the US are the euro zone’s biggest trading partners. Hence, a expansion in the euro zone's GDP could also translate positively on UK.

UK’s annualized CPI for the month of October will be issued on November 17. Inflation remains to be one of the major concerns of the BOE since the present CPI is still a bit far from their 2% target. The latest CPI is expected to jump by 1.4% from the 1.1% registered last during the last period. An increase in the CPI could lift the pound.

On November 18, the BOE will publish its recent MPC meeting minutes. Remember that the BOE recently expanded their Asset Purchasing Facility by £25 billion while leaving their interest rate unchanged. The minutes will provide us with more details regarding their latest decision.

Lastly, UK’s retail sales in October will be reported on October 19. Retail sales are seen to increase by 0.6% after staying flat at 0.0% during the previous month. Retail sales are a major component of the country’s consumption. Therefore, a rise in the figure could also push the GBP higher.

[PipDiddy]

Looks like the Cable started the week on a firm tone yesterday when it soared all the way to last week’s high, around the 1.6850 price region, marking the second consecutive day of gains.

Sentiment shifting economic data from UK yesterday was non-existent so the most likely suspect for the increased appetite was the higher-than-expected uptick in US retail sales. Retail sales for October, which was predicted to rise by 1.0%, grew by 1.4% instead.

The data to watch out today is UK’s consumer price index report at 9:30 am GMT. The CPI measures the monthly change in the prices of goods and services bought by consumers. In other words, the CPI is a measure of UK’s inflation rate, one of the Bank of England's primary considerations when setting the country’s interest rates. The forecast is that prices rose 1.4% in October. The core version of the report which excludes the price of volatile items such as food, energy, alcohol and tobacco, is expected to print a 1.7% increase. Lastly, the retail price index, which only considers items bought by people for consumption purposes, would probably decrease again, this time by 0.9%.

[PipDiddy]

Resilient was the word of the day for the pound! Unlike other majors, the pound didn’t bow down (too low at least) against the USD, and was able to keep losses at a minimum. Cable closed lower at 1.6815, just 18 pips lower than its opening price.

The pound was boosted from some encouraging inflation data that was released yesterday. The CPI report indicated that consumer prices rose by 0.2% last October. This pushed the yearly inflation rate to 1.5%, much higher than the October’s reading of 1.1%. Over the past year, inflation (and deflation) has been a major concern for the Bank of England, especially given the amount of quantitative easing measures that the central bank has implemented. Take note that normally, more stimulus leads to inflation, but this hasn’t been the case, as consumer prices have been falling. Now that inflation is starting to pick up, it could signal that BOE will be less likely to keep adding to their asset purchase program.

Speaking of quantitative easing measures... the minutes of the latest monetary policy meeting will be available at 9:30 am GMT. It will be interesting to see what led to the decision to expand quantitative measures by £25 billion. I wouldn’t be surprised if we see that some members had actually pushed for an even bigger figure. Also, be on the lookout for comments from MPC members, especially after the results of the CPI reports yesterday.

Also, at 11:30 am GMT, the CBI Industrial Orders report will be released. The report measures whether manufacturers expect orders to pick up or not with scores above 0 indicating that orders are expected to increase. For this month’s reading, it is projected that the index will rise to -47, up from -51 last month.

[PipDiddy]

Just as the BOE officials had a split decision on their bond-purchase program, price action of the pound pairs was a toss-up between a gradual descent and tight consolidation. The GBPUSD edged lower during the US session while the GBPJPY was busy building up momentum for a breakout.

Out of the nine members of the BOE's monetary policy committee, seven voted to expand the bond-purchase program by 25 billion GBP, one voted for a 40 billion GBP expansion, and one voted to keep the program unchanged. Chief economist Spencer Dale, who lobbied for no expansion, said that an increase in the bond-purchase program could pose a risk to inflation. On the other hand, David Miles, who sought a 40 billion GBP expansion, argued that more bond purchases could provide insurance against downside risks to growth such as constrained credit.

Still, the entire committee raised their forecasts for growth and inflation. They projected that the inflation rate would reach the central bank target of 2% in the next two years even if the central bank starts implementing rate hikes next year.

Meanwhile, the CBI industrial orders expectations climbed from -51 to -45, surpassing the -47 consensus for November. Although this month's reading is still at the negative zone indicating that lower order volumes are expected, the indicator's modest improvement over the previous month's reading shows that output is expected to grow slightly.

The cable was able to stage a short rally after these reports hit the airwaves but it lost ground when the US housing starts and building permits data were released. The reports showed that the US housing sector took a huge tumble, causing a wave of risk aversion.

Today, the UK has another key report on tap, namely its retail sales report. After staying flat in September, sales at the retail level are expected to climb by 0.6% this October. The actual figure is due 9:30 am GMT. Also due today is the public sector net borrowing report, which could show that net borrowing slid from 14.8 billion GBP in September to 6.7 billion GBP in October.

[PipDiddy]

The pound lost its grip against the dollar for a third day in a row yesterday. Investors moved again to the safety of the USD given the lack of positive catalyst in the UK and the US. The cable fell to as low as 1.6607 before closing at 1.6659.

UK’s annualized retail sales rose by 3.4% in October, which is its fastest pace since May 2008. On a monthly basis, retail spending has increased by 0.4% from September. The increase in sales was said to have been due by the 10.7% year-over-year jump in clothing and footwear spending during the period. Sales are still seen to advance as consumers anticipate the holiday season. In any case, the monthly rise in the figure was still below the 0.6% estimate. The pound weakened a bit following the report.

No economic reports are due today in the UK and the US. Germany, on the other hand, will publish its PPI for the month of October. Germany’s monthly producer prices are seen to have risen by 0.1% in October after falling by 0.5% during the month prior. An increase in the figure could spark some confidence and boost the other “anti-dollars” like the EUR and possibly the GBP as well.

[PipDiddy]

The Cable took another nasty hit last Friday as risk aversion remained strong in the currency markets. The Cable, after hitting a high of 1.6676 during the Asian session, fell almost 200 pips and ended the week with its head just a few pips above the 1.6500 handle.

Looking ahead, UK’s economic cupboard is packed.

Tomorrow, watch out for the quarterly inflation hearing at 9:45 am GMT. During the hearing, UK’s Parliament Treasury Committee hears out the Monetary Policy Committee’s opinion regarding their outlook on the country’s economy. At 3:35 pm GMT the same day, BoE Governor Mervyn King will be testifying in front of the Economic Affairs Committee in London. These talks are important to investors because the people speaking have a huge influence on setting the nation’s interest rates. An optimistic rhetoric or a prospect of a rate hike could finally help the pound find some buying support.

On Wednesday, expect to see UK’s revised GDP report for the third quarter of this year at 9:30 am GMT. Traders are looking forward to -0.3%, a slight improvement from the initial estimate of -0.4%. If the actual figure comes out higher than forecast, we could see traders buy up the pound.

On Thursday, the CBI Realized Sales survey will be made public at 11:00 am GMT. The survey tries to assess whether sales volume are increasing or decreasing. The forecast is a reading of 11, higher from last reporting period’s reading of 8. A reading above the "line in the sand" number of 0 means that sales volumes are rising, which is also good for the economy.

Oh, and lastly, the Nationwide House Price Index for this month could be released any time between Wednesday and Sunday this week. The expectation is that the selling prices of homes taken with mortgages funded by Nationwide grew by another 0.4%.

[PipDiddy]

Bounce back Monday, as the cable was able to make up for some of the lost ground it made last week. The pair closed over a hundred pips higher, ending the day at 1.6618 as risk appetite was the theme across the board. When will traders make up their mind?!

The pound rallied yesterday as stocks rose, which once again led to a dollar sell-off. If you haven’t noticed yet, it seems that whenever stocks do well, so do high yielding assets like the pound. It seems that risk sentiment is still a major factor, so keep this in mind while trading.

We could be in for a lot of noise over the next couple of days as quite a few high impact reports are on deck. Today, at 9:30 am GMT, the BBA mortgage approvals and preliminary business investment q/q reports are on deck. The BBA report is expected to show that 44,000 new mortgages were approved last month, up from September’s figure of 42,100. The business investment report – which tracks capital investments made by corporations and the government – is predicted to show that investments fell by just 3.5% in the 3rd quarter, after they had fallen by an upwardly revised 10.2% the previous quarter. If these reports come in better than expected, we could see the pound trade higher.

I have a feeling that there might not be too much of a market reaction following those reports, as 15 minutes later at 9:45 am GMT, the inflation hearing reports will be available. Take note that during this recession, inflation has been falling, which has let the Bank of England induce more and more economic stimulus into the economy. In case you forgot, the central bank recently agreed to expand their asset purchase program by another £25 billion. Let’s see what central bankers have to say about inflation and the economy as a whole. And before I forget, don’t forget to keep your schedule clear at 3:35 pm GMT, when BOE Governor Mervyn King will be commenting about the inflation hearings as well!

If all those reports today aren’t enough for you, then don’t worry – tomorrow should be a douzy as well! The nationwide HPI m/m report could be released anytime tomorrow while the revised GDP q/q report is due as well at 9:30 am GMT. The GDP report is expected to show a slight improvement to a 0.3% decline, up from the initial release that showed a 0.4% decline.

[PipDiddy]

The pound struggled to get back on its feet yesterday as BOE Governor Mervyn King announced that the central bank was open to more easing. Pound pairs moved sideways as King pinpointed the weaknesses in the British economy.

The UK's inflation report was filled with dovish comments and warnings about the roadblocks to recovery. BOE officials noted that credit is still tight while spending remains constrained, dampening economic activity. This may prompt the central bank to expand their quantitative easing programs ahead of their next policy meeting in February.

Because of the bearish tone struck by the inflation report, strong economic reports from the UK were unable to provide upward momentum for the pound. Third quarter business investment sank by only 3%, less than the expected 3.5% decline. This was also seen as an improvement over the 10.2% drop in business investment for the second quarter. Meanwhile, BBA mortgage approvals rose a notch from 42.1K in September to 42.2K in October.

All eyes are on the release of the revised third quarter UK GDP at 9:30 am GMT today. A slight upward revision is expected but it probably wouldn't be enough to carry the GDP reading to positive territory. Analysts forecast that the revised GDP would be at -0.3%.

No other high impact reports are due from the UK today but keep an eye out for US economic reports set for release. Durable goods orders, weekly unemployment claims, and new home sales could have a huge impact on risk sentiment so stay on your toes!