Daily Economic Commentary: United Kingdom

[ForexGump]

It looks like Thursdays strong gains by the pound were merely a retracement, as the GBPUSD pair dropped close to 150 pips on Friday. The pair dropped as it seems that risk aversion reigns right now, which is causing traders to move away from higher yielding currencies like the pound.

Last Friday only brought a couple of reports from the United Kingdom, namely the PPI Input and Output reports. The input report showed that company input prices rose by 1.5% - meaning that they are paying more for their goods and raw materials. The output report indicated, however, that this past June, consumer prices (the price at which consumers pay for the final goods) fell by the most in 8 years. The yearly decline was at 1.2%, with prices falling by 0.2% from the previous month. It was predicted that prices were going to increase by 0.3% during the month of June.

As this continues, deflation risks will increase in the UK. The BOE predicts that inflation will be at 0.4% by the end of this year and will rise to 1.5% next year. But if current conditions continue to persists, inflation may not even hit these targets. This could give room and reason for the BOE to expand its asset purchase program (quantitative easing), which the bank refrained from doing last week.

Up next on the UK economic calendar are the BRC Retail Sales Monitor y/y and RICS House Price Balance reports, due at 11:01 pm GMT today. The first report measures the change in retail sales on a same-store basis, while the second report surveys property surveyors on current market prices of homes.

Tomorrow, more inflation data is due as the CPI y/y and RPI y/y reports will be released at 8:30 am GMT. Will the data prompt more deflation speculation? The CPI report is expected to show yearly inflation to be at 1.8%. With the recent data showing falling prices, the release may come up short of expectations.

[ForexGump]

The GBP greeted the week with a nosedive after an IMF report pointed out that the UK cannot afford another fiscal rescue given the current state of their balance sheet. Surprisingly, the GBP/USD pair was able to pull up from the dive - just 50 pips away from the 1.6000 mark.

Selling pressure could continue for the GBP as the UK economy is clouded with a huge budget deficit. The Organization for Economic Cooperation and Development or OECD remarked that the budget deficit could climb to 14% of the nation's GDP, which is unsustainably high.

Economic data freshly released today carries a more upbeat tone, with retail sales up by 1.4% year-on-year. Thanks to the summer heat, sales of ice cream, frozen desserts, sunglasses, and sandals contributed to the uptick. Meanwhile, the housing market also posted an improvement as more surveyors reported that home prices increased. Only 18.1% of real estate agents, compared with the forecast of 39.6%, reported that house prices dropped.

A bunch of high-impact economic reports are on the agenda for the rest of the day. CPI, retail price index, and core CPI are all due at 8:30am GMT. Price levels are projected to be up by 1.8% year-on-year in June after posting a 2.2% increase in May. Retail price index or RPI is expected to be down by 1.6% while core CPI is eyeing a 1.6% rise.

Odds are in favor of the GBP suffering another cloudy day as the economic forecasts indicate that inflation would fall below the BOE target. CPI has been sitting on top of the 2% mark since October 2007 and if June's reading falls below expectations, then we could find the GBP/USD on another crash course towards 1.6000.

[ForexGump]

Yesterday’s trading was a bit shaky for the GBP as it went up and down like a pulse. Good thing it still managed to close on the positive side versus the USD and the JPY. However, it got blindsided by the CHF when it was pushing its way against the EUR and the CHF.

UK’s CPI for the month of June came in line with expectations at 1.8%. The previous month’s reading was pegged at 2.2%. CPI measures the change in the price of a set of goods and services. The latest score marks its first reading below the Bank of England’s 2% inflation target. The RPI, which measures change in the price of goods and services bought by consumers for the purpose of consumption, fell further by 1.6% after already falling by 1.1% in the month prior. This drop in inflation figures may put UK’s recovery on a long haul as domestic demand tightens.

The GBP got a boost during the US session against the USD and the JPY after a mixed set of US economic data and upbeat earnings results from Goldman Sachs and Johnson & Johnson.

Today (8:30 am GMT), UK’s claimant count change for the month of June is scheduled for release. The change in the number of people who are applying for unemployment benefits is expected to reach 41,400 from the previous month’s 39,300 count. Such increase adds to the list of UK’s ‘negatives’ and may put a downward pressure on the GBP.

[ForexGump]

It looks like there’s no stopping the GBP from extending its gains versus the USD as the week carries on! The catalysts for the boost: better-than-expected earnings and positive economic data. It seems that whenever sentiment is down, investors find some reason be optimistic again about the world economy.

The Claimant Count Change for June, which records the number of jobless people who claimed unemployment benefits for the first time, came out better than expected. It reported that only 23,800 people filed insurance, much lower than the 41,400 people initially projected. The figure on unemployment claims has been lower and lower each month indicating that the recession is easing its grip on the nation’s labor market. Still, employment conditions remain tough as the nation’s unemployment rate hit 7.6% in May.

No economic data for today and tomorrow so the GBP’s price action would at the mercy of traders’ tolerance for risk. After the strong move yesterday, the GBPUSD pair looks very heavy... but we never know how far these things go so it’s best to be careful and not get burned!

[ForexGump]

It looks like pound buyers took a tea break yesterday, as the strong rally took a breather and we saw a bit of retracement on pound pairs. The GBPUSD pair traded within range yesterday, as it retraced during the Asian session before bouncing back up during the European and US trading sessions.

We could see more range bound motion for pound pairs today, as no economic reports are scheduled for release today. With the week coming to a close, will we see traders taking profit off of the recent rally? Be on the lookout for any one directional moves.

[ForexGump]

Things aren't looking so bright and sunny for the UK as economic data due this week threaten to hurt the GBP. Keep an eye out for the minutes of the latest monetary policy committee meeting due for release on Wednesday.

After the downward revision of the UK's Q1 GDP from -4.1% to -4.9%, analysts are convinced that economic conditions in the UK are on the gloomy end. The Q1 GDP is currently sitting at the bottom of the BOE's range of forecasts, which opens up speculations about further quantitative easing. An expansion of the BOE's quantitative easing efforts could send the GBP falling faster than you can say "Oh bloody hell..."

Q2 GDP figures, which are due Friday this week, could bring another wave of pessimism for the UK. A contraction of 0.3% is expected and this would drag the annual GDP rate to an even lower -5.2%.

No economic data are due this Monday but, considering the upcoming set of reports, the pessimistic outlook for the GBP could manifest as early as today. Also, US Fed Chairman Ben Bernanke's speech on Tuesday would be a risk determinant - and this could either slow down or speed up the price movement in the GBP/USD.

[ForexGump]

It was a revenge of the fallen for the GBP as it completely recovered all its losses yesterday against the primes - USD and JPY. Fueled by the matrix of risk appetite, the GBP laid its claim once again in yesterday’s trading world.

The GBP was under the radar yesterday in terms of economic updates. The catalysts that propelled the Sterling higher are the better-than-expected earnings results of some US companies like Halliburton, Hasbro, Johnson Controls, and Eaton. Goldman Sachs also raised its target for the S&P 500 to 1060. The main source of mana, however, came in the last minute rescue of the CIT group. CIT, a 101 – year commercial lender based in New York, was said to be on the verge of bankruptcy. It was reported also that the government refused to rescue the firm for the second time. Luckily for CIT, an agreement with its bondholders to secure a $3 billion financing was reached. Risk appetite gave boost to higher yielding assets like the GBP following the positive news.

Today (8:30 am), UK’s public sector net borrowing for the month of June will be issued. UK’s public borrowing is expected to come in at £15.7 billion after having a public loan amounting to £19.9 billion during the last period.

Risk appetite in the US markets should continue to fuel higher yielding assets like the GBP. Positive corporate earnings in the US would definitely send the GBP higher against the JPY and the USD.

[ForexGump]

The GBP edged slightly lower versus the USD yesterday as risk hungry traders took a break from buying up the currency. It seems that poor results on economic data slightly weighed on the GBP as well.

A report by the UK National Statistics Office yesterday showed that the country’s budget deficit hit its worst levels in June. Standard & Poor, a firm which measures creditworthiness, has already downgraded the outlook for UK’s credit-rating previously. Debt incurred for June was reported to be 13 billion pounds, slightly better than the 15.7 billion pound forecast. Still, this does not change the country’s public finances are in terrible shape.

On today’s economic calendar, we’ve got the Monetary Policy Committee meeting minutes at 8:30 am GMT. The MPC meeting minutes basically shows the vote breakdown of Bank of England MPC in setting the country’s benchmark interest rates. In addition, it provides an inside look into how the MPC views the country’s economic condition. The nine MPC members probably all voted to keep rates unchanged. Also following at 10 am GMT is the industrial trends survey. Economists expect -46. This means that manufacturers believe that order volume for July will still show a decline. Given both these reports, we might see a bit of GBP volatility... So as always, stay on your toes!

[ForexGump]

Up and down ride for the pound yesterday, as the GBPUSD pair shot down during the European session before bouncing back up right before the US session. The pound continued to rally as it closed the day with a gain. We’ve been seeing some range bound movement and consolidation from the pound as of late – is UK weakness at hand?

As expected, the Bank of England voted unanimously to keep the current level of its quantitative easing (asset purchase) program and to keep the base rate at 0.50%. The Monetary Policy Committee said that there was no reason for them to expand as there have been some encouraging signs as of late. The MPC also said that downside risks to GDP had “probably diminished”. The committee will meet once again in August to review economic forecasts to see whether they are still in line with the actual state of the economy.

Also released yesterday was the CBI Industrial Orders Expectations. The report – which surveys manufacturers on current market conditions – posted a worse than expected reading of -59. It was expected to have a score of -46. Interestingly, the pound did not suffer any setbacks after the release of the report and actually bounced up. This points out that even though bad data comes out, it is still risk sentiment that is largely pushing the market as of late.

Later today at 8:30 am GMT, retail sales and mortgage approvals data will be released. The retail sales report – which is predicted to show a 0.4% in sales last month - tends to cause a lot of volatility in the market, so watch out for any strong moves before and after the report.

[ForexGump]

Close call! The GBP/USD was buffered against a large slide as the UK released a strong retail sales report. Other major currencies (with the exception of the GBP and CAD) bowed down to the USD yesterday as risk aversion made its way back in the market.

Retail sales recorded a 1.2% increase in June, beating forecasts of a mere 0.4% uptick. This gave the GBP/USD a boost towards the 1.6500 mark. Signs of improvement in the economy and massive discounts encouraged shoppers to buy more food and clothing. June's retail sales figure posts a significant improvement over the 0.9% decline in May, suggesting that consumer spending is on its way to recovery.

The housing industry is also starting to climb out of the rut. Loans for home purchases rose to 35.2K, the highest since March 2008. Mortgage approvals were expected to rise from 31.9K in May to only 32.3K in June. If further advancements are seen in the housing industry and in other sectors of the economy, then the BOE could lean towards ending its quantitative easing policy by its next meeting in August.

Moving along... Second quarter GDP figures are on the agenda for today. The report is due at 8:30 am GMT. Economic growth is expected to contract by 0.3% in the second quarter, which is a dramatic improvement over the 2.4% contraction in the first quarter. This could drive the annualized GDP slowdown to 5.2% but the recently reported retail sales figure hints at an upward surprise. Stay on your toes!