Daily Economic Commentary: United Kingdom

Trading Discussion News and Economy
165

The Cable went for a wild ride yesterday. It gained some decent ground early on but eventually gave it all up when the the Bank of England’s inflation hearings went underway. The Cable closed the US session at 1.5583, more than 100 pips from its opening price during the Asian session.

In the inflation hearings, BOE head honcho Mervyn King said that recovery will be slower and harder than they initially expected, as the economy still faces some major problems. According to him, the 0.1% growth experienced during the final quarter of 2009 has yet to be confirmed and the country could head back into recession once again. He added that inflation would probably remain below the bank’s target for the next two years, which would keep downward pressure on interest rates.

In other news, the report on manufacturing production that came out earlier printed unexpectedly positive results. It showed that production surged 0.9% in December, more than twice the initial forecast. The growth was also much higher than the revised up 0.2% increase seen the month before. However, on a yearly basis, was 10.5% down for 2009, the largest in more than four decades.

No important economic data due for release today and tomorrow so the Cable’s price action would most likely be driven by news coming out of other major economies, most especially the retail sales report coming out of the US tomorrow at 1:30 pm GMT.

166

Up and down day for the pound, as it stuck within a range. Luckily, its opening price was near its lows for the day and the GBPUSD pair closed at 1.5696, allowing it to erase much of its losses from the previous day.

With no data coming out yesterday, the pair was subject to degrees of risk sentiment. It appears however, that the pound wasn’t heavily effected by news coming out of the euro zone regarding Greece. With no high impact data on deck today, we can probably expect more range bound motion during the European session as traders prepare something special for their significant others.

Watch out though, for the US retail sales due tonight at 1:30 pm GMT. This could cause some volatile moves in the market, stop you out and well, ruin your Valentines weekend! So be careful!

167

After dropping from its precious 1.6000 mark the previous week, it was all about ranging for the GBPUSD this past week. The pair traded within a range of just 200 pips. Could we be in line for a breakout this week?

Nothing much high impact reports are coming out today so we may see more ranging once again. Watch out though, as traders will be waiting for the release of inflation data tomorrow at 9:30 am GMT. The CPI report is expected to print that consumer prices are up by 3.6% from levels a year ago, up from 2.9% in the previous month.

Take note that in the last BOE Inflation Hearings, central bank officials had predicted that inflation would remain subdued over the next two years. If this report comes out better than expected, we may just see pound buying come back in style.

168

The pound just traded within a tight range against the dollar and yen yesterday due to a bank holiday in the UK and the US. The cable (GBPUSD) closed slightly lower at 1.5660 from 1.5675. The guppy (GBPJPY) also edge lower to 140.91 from 141.34.

Things will start to warm up though later at 9:30 am GMT with the release of the UK’s year-over-year CPI figures in January. The UK’s headline y/y CPI is seen to have jumped to 3.6% in January from 2.9% from the month prior. Similarly, the core version of the index is projected to have spiked also to 3.2% from 2.8%.

Since the spike in general prices only reflect the sharp drop and rebound in oil prices during the period covered, inflation is just projected to be short lived. Still, Bank of England Governor Mervyn King is expected to issue an open letter to finance minister Alistair Darling explaining the situation since the UK’s headline inflation is anticipated to have exceeded the BOE’s 2% inflation target by at least 1%. Given the reason stated above and the government’s priority of supporting economic growth first, it is then unlikely for the finance minister to encourage the BOE to tighten its policies. Nevertheless, the flux in the UK’s economy could reflect negatively on the GBP.

169

Thanks to improved risk appetite yesterday, the Cable was given a chance to gain a significant amount of ground in yesterday’s trading session. The Cable found itself at 1.5791 by the end of the US session, up more than 100 pips from its Asian open price.

The consumer price index for January released yesterday showed that prices rose 3.5%, slightly lower than the 3.6% initially forecasted. The core version of the report, which excludes the prices of volatile items such as food and energy, showed an increase of 3.1%, which was also failed to meet expectations. Generally, a rising consumer price index is seen as bullish for the Cable because it could push the Bank of England to raise interest rates in the future.

The Cable could be in for another wild ride today as the minutes of the last MPC meeting and reports on UK’s labor market will be released at 9:30 am GMT.

The Claimant Count Change, which measures the monthly change in the number of people who claimed unemployment benefits, is predicted to show a decrease of 14,600 for the month of January.

Meanwhile, the average earnings report, which measures the increase or decrease of wages employees receive, is expected to show a rise of 1.2% in December, up the 0.7% increase seen the month before . Despite the improvements in both reports, joblessness in the country probably remained at 7.8%.

Lastly, the MPC meeting minutes outlines the results of the BOE’s most recent interest rate meeting. The minute tend to garner a lot of attention because it gives them a way to predict possible changes in the bank’s monetary policy.

170

Tough day at the office for the pound, as it lost most of the gains it had made the previous day. The GBPUSD pair touched as high as 1.5815, before dropping all the way down to 1.5682. Can the pound recover from this disaster?

The UK received some bad news yesterday when the Claimant Count Change, which measures the change in the number of people filing for unemployment benefits, rose by 23,500, the highest level in 13 years! It was expected that claims would drop by 10,000.

In addition to this, the minutes of the latest MPC meeting were also some somewhat pessimistic. While the MPC decided to hold the asset purchase program at current levels, they did not rule out the possibility for future purchases. According to Bank of England Governor Mervyn King, more time is needed to see the full effects of the program and to see whether it is effective or not. Looks like Forex Gump really does have some reasons to hate the pound.

Looking ahead, public sector net borrowing data will be available today at 9:30 am GMT. It is expected that a surplus of £2.4 billion was posted in January, a complete reversal from December’s spending of £15.7 billion. If the surplus comes out bigger than expected, it may signal that the British government is trying to cut back on spending.

At 11:00 am GMT, the CBI industrial orders survey results are due. The index measures what manufacturers think of current and future orders levels. Scores above 0 indicate rising orders, while scores below it indicate otherwise. The index is expected to print a score of -35, slightly up from last month’s reading of -39, which would indicate that orders are expected to increase in the coming months. This may just provide some support for the beaten up pound.

171

Let me echo Jack the Pipper in exclaiming “Oh, that nasty British pound!” It was the worst performing currency yesterday as a combination of weak economic reports from the UK and a US discount rate hike pushed the GBPUSD below the 1.5600 handle.

Let’s start with the UK’s bleak economic figures. Mortgage approvals dipped to 49,000 in January while the public sector net borrowing report printed a 4.3 billion GBP deficit. This pushed the nation’s net debt to 848.5 billion GBP, amounting to almost 60% of the UK’s GDP. Aside from completely missing the consensus of a 2.6 billion GBP surplus, the data was disappointing since it also marked the UK’s first January deficit on record. Tax collections, which typically push the balance higher during the first month of the year, failed to do so this 2010.

Meanwhile, the CBI industrial orders expectations index came in short of expectations as it climbed from -39 to -36 in February. Still, this marks the indicator’s slowest pace of decline in more than a year. Despite this relatively upbeat news, the pound fell vulnerable to greenback strength, which ensued after the Fed announced a discount rate hike of 25 basis points.

The retail sales report is on deck for today and it could print a 0.5% drop for January, following December’s 0.3% rise. Judging from the previously released BRC retail sales report and their deteriorating labor conditions, retail sales could come in weaker than expected. If it does, more pound selling could take place. Ouch!

172

The pound had its biggest daily loss of the month so far against the dollar and yen last Friday. The cable (GBPUSD) slid to 1.5456 from 1.5621. Similarly, the guppy (GBPJPY) fell to 141.60 from 142.56.

The UK’s month-over-month retail sales in January slipped by 1.2%. The drop, which was worse than the 0.5% consensus, was said to have been caused by the extreme winter condition that hit the country during the month. Household sales crashed by 13.4% as households had a difficult time going out of their homes to purchase things. Well, it seems like nothing is going right for the UK as of the moment. First it was the country’s surging debt, then the spike in short term inflation and now the weather. Tough luck.

The pound, as expected, also dipped following the report.

Today (9:15 am GMT), BOE Governor Mervyn King and some of his crew will testify on inflation and the country’s economic outlook before Parliament’s Treasury Committee. The UK’s y/y CPI recently jumped to 3.5% which is way more than the central bank’s 3.0% threshold. Of course, the governor will have to explain to the parliament how the central bank plans to curb this before it gets out of hand.

On Thursday, the governor will again testify at the Banking Commission Hearing, in London regarding the future of banking in the UK. Traders will most certainly tune in to his speech for clues concerning the bank’s future monetary policies.

The UK’s CBI realized sales in February is also due on Thursday. The index is projected to improve to -1 from -8. A reading below 0 indicates a lower sales volume. Though there’s a chance that the account will come in worse than expected given the significant in retail sales that we saw last month. A weak figure here could once again hurt the pound.

On Friday, the country’s HPI in February will be issued. The average prices of homes are seen to have increased by 0.4% in February after already jumping by 1.2% in the previous month. A gain in home prices could soon reflect on the nation’s inflation. Hence, any jump in the figure could give the pound some short term support.

The focus, however, will be at the release of the country’s revised 4Q GDP. The UK’s 0.1% 4Q growth is projected to be revised positively to 0.2%. With all the bad stuff that has been coming out of the economy as of late, a positive revision here could give the pound some much needed relief.

173

The Cable started out the week on slow note yesterday, just bouncing around a tight 50-pip range. The Cable found itself at 1.5480 by the end of the US trading session, a mere 20 pips higher from its Asian open price.

Trading volume would probably pick up today, especially since BOE Governor Mervyn King and his merry men, the Monetary Policy Committee, are set to testify before UK’s Treasury Committee at 9:15 am GMT. They are set to discuss UK’s economic and inflation outlook. Inflation has been a hot topic for UK as of late particularly because its most recent CPI report unexpectedly exceeded the BOE’s 2% target.

Shortly after the inflation hearings, the BBA mortgage approvals report will be released at 9:30 am GMT. It is projected to show that there were 45,300 mortgages approved in January, slightly lower than the figure seen in December. If the actual figure comes in higher, the Cable could garner some buying support.

174

Looks like pound bulls couldn’t enjoy their tea time yesterday, as the pound was rocked by comments made by BOE officials. The aftermath? Cable fell from a high of 1.5576 to close at 1.5409!

Bank of England Governor Mervyn King hit the markets with some downbeat comments during the inflation hearings yesterday. He said that the eurozone’s problems are affecting the UK. Take note that the euro zone is the UK’s major trading partner. With the recent news that recovery in the euro zone is faltering, coupled with concerns regarding Greece, there could be a spill over effect onto the British economy.

King also added that if the economy did not improve, there could be a case for even extending the central bank’s ₤200 billion asset purchase program. Remember, last week, data revealed that inflation was at 3.5% in January. With rising inflation, one could argue that it is time for the BOE to cut back on quantitative easing. However, David Miles, another member of the MPC, said that if growth is indeed subdued, it would calm down inflationary pressures, which would give the MPC some allowance to extend quantitative easing measures.

In other news, the BBA mortgage approvals came in worse than expected, printing that only 35,100 mortgages were approved last month. This marked the lowest figure since May 2009. Officials attributed the decline to poor weather conditions. Let’s see how this develops in the coming months.

No high impact data today, but start gearing up for tomorrow, when Mervyn King will once again be speaking at 9:30. After flooding the markets with some pretty dovish comments yesterday, can we expect more of the same tomorrow?

175

The pound zigzagged its way across the charts and failed to rebound from its recent slide against the greenback and yen. BOE policymaker Adam Posen’s comments suggesting further quantitative easing for the UK reinforced the bearish bias for the pound.

According to Posen, the central bank is keeping its doors open for more asset purchases in case economic growth falls back into the red zone. He also mentioned that there is currently no pressure to cut back on their stimulus programs, citing that inflationary pressures could be subdued later on. BOE Governor Mervyn King and monetary policy committee member David Miles could reiterate these statements their own speeches today at 9:30 am GMT and 6:00 pm GMT respectively.

Also due today are the preliminary business investment report for the fourth quarter of 2009 and the CBI realized sales report. Business investment is estimated to rebound by a modest 0.2% after sliding down by 0.6% in the third quarter. Watch out for the actual figure due 9:30 am GMT. Meanwhile, sales are expected to improve in February as the CBI realized sales index could climb from -8 to -1 during the month. Better than expected figures could help keep the pound afloat.

176

The British pound got hammered big time yesterday. It was as if it got hit by a runaway mack truck or something. The guppy (GBPJPY) slid and closed at 136.06 from 138.87. Similarly, the cable (GBPUSD) fell and settled at 1.5270 from 1.5399.

The pound was first knock down when the news regarding Greece’s possible credit downgrade by the S&P got out during the Asian session. It got its next blow when the preliminary business investments report showed an unexpected 5.8% decline during the fourth quarter. The pound continued to slide even after a significant improvement in the UK’s CBI realized retail sales which came in a t23 from -8.

Today, watch out for the release of the UK’s nationwide HPI and revised 4Q GDP at 7:00 am GMT and 9:30 am GMT, respectively. The UK’s HPI is seen to expand again by 0.4% in February after already gaining by 1.2% during the previous month. The country’s 4Q GDP, on the other hand, is likely to be revised up to 0.2% from 0.1%.

Strong readings in these accounts reflect positively on the UK’s economy, giving the pound a much needed support.

177

Thanks to improved risk appetite, the Cable was able to hold on for dear life last Friday. It ended the week at 1.5250, just 20 pips lower from its opening price during the Asian session. Still, all in all, the Cable fell about 200 pips from its opening price last week.

Economic data that was released that day was mixed. Nationwide’s house price index reported that house prices dropped unexpectedly by 1.0% in February. The forecast was for an increase of 0.4%. On the other hand, the GDP report for the final quarter of 2009 was revised up to 0.3% from 0.1%, which was able to provide some support to the pound.

This week kicks off with the release of the manufacturing PMI and the net lending to individuals at 9:30 am GMT later.

The manufacturing purchasing managers’ index is expected to print a reading of 56.3 for the month of February. Although still above the baseline reading of 50.0 which separates growth from contraction, the reading is slightly lower than January’s reading of 56.7, indicating that the pace of expansion of the manufacturing industry probably slowed.

Meanwhile, the report on net lending to individuals is predicted to show that new credit supplied to consumers rose by 700 million in January. Increasing debt levels are usually seen as bullish for the domestic currency because it implies that people are comfortable enough with their financial to borrow money and spend.

On Wednesday, purchasing managers’ index for the service industry is due. The expectation is a reading of 55.0 for January, up the 54.5 seen the previous month. Just like the manufacturing PMI, a falling reading is typically understood as bearish for the domestic currency because it could lead to reduce economic activity and growth.

On Thursday, the BOE will announce its decision on the country’s benchmark interest rates as well as any changes to its quantitative easing program. The bank is widely expected to keep rates steady and hold off from any expansion of its quantitative easing program.

On Friday, February’s producer price index for input will be released. The producer price index measures the monthly change in price of goods and raw materials bought by manufacturers. The forecast is an increase of 0.1%, which is a significant slow down in pace from the 2.0% increase in January.

Also to be released anytime this week is the Halifax house price index. The report, which measures the change in the selling price of homes, is expected to show a rise of 0.3% January-on-December.

With the amount of data on the docket, this week could prove to be a wild one for the currencies… So buckle up your forex seat belts and prepare for a bumpy ride!

178

Ouch… Ouch… Ouch… The pound took one on the chin yesterday, as the GBPUSD pair dropped almost 400 pips in intraday trading to recover… slightly. Cable ended trading at 1.4992, still down 200 pips from its opening price.

The huge drop in the pound was a little surprising, as the UK actually got some good economic data yesterday, as the manufacturing PMI held steady at 56.6, which was right in line with expectations. This indicates that businessmen and purchasing managers see business conditions to improve. Meanwhile, the net lending to individuals (otherwise known as consumer credit) rose by £2 billion, which was almost triple the expected increase.

Still, the pound came tumbling down! Why? Well, there were a couple of reasons that experts have pointed to. For one, some point to a huge sell off of their pound reserves by British insurer Prudential, who said were going to purchase American International Group. Because of the nature of the deal (cash deal), Prudential needed to sell off its pounds in order to make the purchase.

Others also pointed to traders and investors potential setting up their positions ahead of the BOE meeting later this week. Word on the street is that the BOE may actually expand quantitative easing measures.

Meanwhile, some cited the results of recent polls in the UK suggesting that the nation will have its first minority government in 26 years after the elections later this year. This brings up the possibility of a “Hung Parliament” - this is when no one party is in charge, which makes it more difficult for the government to pass laws to help solve the nations problems, more specifically, their debt.

No high impact data coming out today but that doesn’t mean we won’t see the pound move. Who knows, the pound may just break its losing streak today and post gains for the first time in 10 days. Just be careful – some traders may see any retracement as an opportunity to short the pound at a better price!

179

Pound pairs were unable to pull up and gasp for air as they continued to dive deep for more than a week. Aside from weaker than expected construction PMI, the UK’s shaky political situation is also to blame for the pound’s weakness.

Let’s start with yesterday’s economic data. Construction activity remained in the contractionary phase as its corresponding PMI fell from 48.6 to 48.5 in February. This implies that construction activity contracted at a slightly faster pace during the month.

On the political front, here’s a brief update on the UK’s election polls. The Conservatives’ lead over the Labor Party narrowed to five points yesterday, adding to the signs that the elections could result to a hung parliament or a minority government. With these opposing parties neck-to-neck in the race, speculations of a political stalemate began to surface. This had a bearish effect on the pound since it would be tougher for the government to reach a decision about trimming the their budget deficit if neither party wins majority of the seats in parliament.

Now back to economic data… Earlier today, the UK released its Nationwide consumer confidence report and it printed a surprise improvement in sentiment. The index rose from 74 to 80, against the consensus of a decline to 71, marking its two-year high. Not bad for an economy that seems to have one problem after another. Will things start to turn up soon for the Brits?

Later on, we’ll have a glimpse of the services PMI at 9:30 am GMT. The report could show that activity in the services sector expanded at a faster pace in February as the index is estimated to climb from 54.5 to 55.0. A better than expected figure could allow the pound to stay afloat but expect no strong moves until the BOE rate decision tomorrow. Would the central bank add to their bond purchase program? That’s what most traders are itching to find out! Stay tuned for the actual statement at 12:00 pm GMT tomorrow.

180

The Pound delivered a pounding on the USD bulls as it was able to catch them on their blindside. The Cable (GBPUSD) soared to 1.5097 from 1.4960.

The Pound started off strong perhaps because of some profit taking actions done by those who shorted the currency during the past several days. During the European session, the better-than-expected UK services PMI, which tallied a score of 58.4 versus the 55.0 consensus, gave the Pound some additional lift.

       Today’s highlight, though, will be the [BOE](http://www.babypips.com/forexpedia/BOE)’s interest rate and asset facility purchase decision at 12:00 pm GMT. The bank is widely expected to maintain its interest rate at 0.50%. Though, some economists speculate that it could also re-open its asset facility program given the country’s current fiscal and political dilemma. My friend, Forex Gump, recently wrote an article about the UK’s current situation and the BOE’s likely move. Kindly check it [here](http://www.babypips.com/blogs/piponomics/how_the_pound_got_so_bloody_he.html).
181

The Cable found itself drowning under the 1.5100 handle again yesterday when worse-than-expected data from the US came out. The Cable closed the US trading session at 1.5030, roughly 70 pips lower from its Asian open price.

As widely expected, the Bank of England yesterday announced that it decided to keep interest rates steady at 0.50% and hold off any expansion of its quantitative easing program. According to the accompanying statement, the inflation would be its primary guide when deciding on its monetary policy. Even with inflation currently at 3.5%, the bank believes that it would slowly head back to its 2% target as the year drags on.

In other news, the Halifax Bank of Scotland house price index, which measures the monthly percentage change in selling price of homes financed by the bank, showed a decline of 1.5%, opposite the 0.3% gain initially expected. A falling house price index is usually seen as negative for the domestic currency because it drives businesses away from investing their money in the housing industry.

On the docket today, at 9:30 am GMT, is the producer price index for input. The report measures the change in the price of goods and raw materials suppliers charge their manufacturers. The expectation is prices rose 0.1% in February, a big drop from the 2.0% increase seen in January. Currency traders could end up selling the Cable again if the actual figure comes in lower than expected.

182

The pound ended on a high note, as it erased most of the losses it had made to start the week. After trading as low as 1.4785 on Monday, the return of risk appetite boosted the GBPUSD, helping it close at 1.5145, just 50 pips away from its weekly opening price.

On Friday, producer price input data was released. PPI figures came in line with expectations, printing an increase of 0.1% in the prices that manufacturers pay for their supplies and raw materials. On an annualized basis, prices have risen by 4.1%. Remember, traders look at PPI figures because it is indicative of potential price increases in manufacturing goods because as manufacturers incur higher costs in production, these costs are normally passed on to consumers to pay for.

Take note that the MPC recently put a hold on quantitative easing measures after some had expected another expansion of the asset purchase program. Now, if inflation continues rise above the MPC’s target of 3.0%, could we see a rate hike soon?

Still, traders didn’t react much to the report. How come? They were sitting tight waiting for the release of the NFP report, which as expected, provided a lot of fireworks in the forex markets.

Tomorrow, the BRC retail sales y/y report is due. No forecasts have been made, but the recent release showed a decrease in retail sales by 0.7%. Part of the reason was apparently because of bad weather during the holiday season. Let’s see if we got some better figures during February.

Also due tomorrow are the RICS house price balance and trade balance figures. The RICS index is expected to show that more surveyors are reporting that housing prices are rising in their respective areas. Meanwhile, the trade deficit is expected to come in at £6.9 billion for the month of January. Given the the recent slide of the pound, could this have led to a rise in exports? Remember, a weaker currency can lead to a rise in exports because it makes those goods “cheaper” compared to those from other countries.

On Wednesday, manufacturing and industrial production figures are due. It is predicted that the reports printed increases of 0.3% and 0.2% respectively during the month of January. If these figures come in much better than expected, it may just give some support to the slumping pound.

Watch out for any news coming out of the political arena. If we hear that the potential for a hung parliament is growing, it could lead to another round of aggressive pound selling.

183

Weighed down by the lack of good news from the UK, the pound erased most of its recent gains against the greenback and the yen. As a result, the GBPUSD dipped to the 1.5030 level while the GBPJPY fell to a low of 135.67.

Even BOE monetary policy committee member Kate Barker’s upbeat remarks were unable to lift the pound in yesterday’s trading. She also cautioned that, amidst the improvements in the UK’s figures, its economy remains fragile. No economic reports were released from the UK yesterday.

Today, the freshly released BRC retail sales monitor printed an annualized 2.2% increase in same-store sales for February. This was an improvement over January’s 0.7% decline, which was mostly a result of poor weather conditions. Meanwhile, the RICS house price balance showed that only 17% of surveyors saw an increase in house prices in their area. This came in as an unwelcome surprise for the pound since the consensus was that 31% of surveyors would report an uptick in house prices.

Later on, the UK will release its trade balance at 9:30 pm GMT. The report is expected to show that the trade deficit narrowed from 7.3 billion GBP to 6.9 billion GBP in January. A weaker than expected report could push the pound even lower.

184

The Sterling Pound logged its second loss against the Yen and the greenback this week yesterday. The Cable (GBPUSD) fell and closed at 1.4995 from 1.5063. Similarly, the Guppy (GBPJPY) declined and settled at 134.94 from 136.01.

The UK’s negative trade balance widened more than expected at -£8.0 billion from -£7.0 billion (revised up from -£7.3 billion) due to a 6.9% drop in the country’s exports. The UK’s latest trade gap is its widest deficit in 17 months. Despite the weakness in the Pound which caused the UK’s products to be relatively cheaper, exports still slumped. As a result, the GBP lost some more support following the report.

Today (9:30 am GMT), the UK’s industrial and manufacturing production in January will be on tap. Manufacturing production is seen to have gained again by 0.3% in January on top of its 0.9% rise during the previous month. Similarly, industrial production likely rose by 0.2% as well after already gaining by 0.5% in December. Increases in these accounts could possibly halt the Pound’s decline.