Daily Economic Commentary: United Kingdom

Trading Discussion News and Economy
185

After the dropping like a rock on Tuesday, the Cable was able to hold on for dear life and trade sideways yesterday. It started out the Asian session at 1.4994, went as low as 1.4871, before retracing most of its losses to close the US trading session hardly changed at 1.4975.

The early drop in the Cable’s value was supported by ugly numbers on its manufacturing and industrial production reports for the month of January. The manufacturing production report showed a 0.9% drop in output, opposite the 0.3% increase initially expected. Similarly, industrial production contracted 0.4% instead of growing 0.2%. The unexpected drop in production has caused some analysts to speculate that UK’s economy could fall back into the recession hole in the first quarter this year!

However, thanks to some stronger-than-expected manufacturing data from Italy and France from euro zone later in the day, the Cable was able to erase some of its losses. Remember, euro zone is a major trading partner of UK and improvements in its economy could spill over to them.

On the docket today is the consumer inflation expectations survey. As the name suggests, the survey reports how much consumers expect the prices of goods and services to increase or decrease for the next 12 months. For the last three months, the survey showed that consumers expect prices to increase 2.4%. Will we see the same later at 9:30 am GMT?

186

Finally! After falling the first three days of the week, the pound bounced back yesterday. The GBPUSD pair closed almost a 100 pips higher to end the day at 1.5060. Could this be the start of a comeback for the cable?

The cable got a nice boost from inflation expectations survey’s results, which printed that the British public expects inflation to be at 2.5% one year from now. This came after recent data indicated that UK inflation exceeded the Bank of England’s target of 2%. If inflationary pressures continue to persist, will the BOE consider to unwind quantitative easing measures?

The skeptic in me says, probably not. Why? Well, there aren’t just enough signs pointing to a stable UK recovery. Until there is more evidence that the UK economy can really stand on its own without any help from the BOE, we probably wont see a rate hike or a tightening of the asset purchase facility for some time.

Nothing major coming out from the UK today but as always, I’m going to watch out for report due from other countries. With the recent change in sentiment that led to pound buying yesterday, who knows what may happen today!

188

Up, up, and away! The pound soared against the greenback and the yen during the end of the trading week as risk appetite boosted demand for higher-yielders. Would it be able to stay up this week?

Aside from enjoying a nice boost from increased risk tolerance, which resulted from a stronger than expected US retail sales report, the pound was also able to rally after BoE Chief Economist Spencer Dale noted that there were tentative signs of faster spending in the UK economy. Although he pointed out that it was still too early to judge the impact of the central bank’s asset purchase program, he assured that the quantitative easing policies are finally starting to work their magic. Still, he reiterated that the BoE is ready to conduct more asset purchases if the economic outlook warrants it.

Moving on… The UK just released its Rightmove HPI a few hours ago and it printed a 0.1% rise in house prices for the month of March. This was a slightly moderated uptick compared to the 3.2% increase seen in February. Tomorrow, another housing market indicator will be released, this time in the form of the DCLG HPI. It could show a 3.6% increase in house prices for January.

Also due tomorrow is the CB leading index for the UK economy. The leading index has been climbing at a decreasing pace for the past three months prior to January. No forecast has been given but another uptick for January could provide support for the pound.

More high-impact reports are due Wednesday this week. Brace yourselves for the release of UK’s claimant count change, which could print an 8.4K increase in the number of people claiming unemployment benefits for February. This would be almost one-third of the number of claimants in January and, if the actual figure is lower than consensus, the pound could climb higher. The average earnings index and the unemployment rate are also due then.

The MPC meeting minutes will also be released on Wednesday. This could show that the BoE policymakers are still unanimous with their vote to keep a lid on their current asset purchases.

Thursday’s schedule has public sector net borrowing data due. The report could show that net borrowing rose from 4.3 billion GBP to 14.6 billion GBP in February. Also due Thursday is the CBI industrial orders expectations report, which could climb from -36 to -33 in March.

Keep your eyes and ears open for any comments regarding the BoE’s current and future monetary policy stance. Speeches from BoE officials this week could provide some hints on that. MPC members Charles Bean, Andrew Sentance, and Paul Tucker are scheduled to testify this week.

189

After hitting a fresh 2-week high last Friday versus the greenback, the Cable (GBPUSD) seemed to have hit a wall at the 1.5200 handle. The pair fell by about 150 pips shortly after revisiting the mentioned level yesterday. The GBPUSD dropped to and closed at 1.5057 from 1.5176.

No economic reports were released in the UK yesterday. The pound slipped during the beginning of the London trading session as fears that the British government won’t be able to address its debt problems mounted. Presently, the government has plans of reducing its deficit to 4.4% of its GDP by 2015. Rating agencies, like Fitch, say that it should bring it down more to 3% of its GDP.

The UK’s economic calendar is report-free again today. Though, the pound would most likely experience some volatility later with the release of the Fed’s interest rate decision. While the Fed is still widely expected to maintain its rate at 0.25%, its outlook on the economy may have turned bullish given the surprise jump in the recent US retail sales. Any hawkish statement by the FOMC could be bearish for the anti-dollars like the GBP.

190

The Cable finally found itself swimming above the 1.5200 handle yesterday. It started off the Asian trading session pretty slow, consolidating in a tight 40 pip range. However, once the European and US sessions went underway, the pair just blew up and staged a magnificent rally to close the day at 1.5250, almost 200 pips higher from its opening price.

No “real” data came out UK yesterday but we’ll be seeing the Claimant Count Change, the unemployment rate and the Monetary Policy committee meeting minutes once the clock strikes 9:30 am GMT later.

The Claimant Count Change measures the change in the number of people who claimed for unemployment benefits in the given reporting period. The consensus is that 8,200 people were added to the count in February, which is a huge difference from the 23,500 increase the month before. Meanwhile, joblessness in UK is predicted to have remained at 7.8% in January.

More importantly, the Bank of England will release the MPC meeting minutes. The MPC meeting minutes basically outlines how the MPC voted on the most recent interest rate decision. It is widely expected that all of the members voted for no rate hike so traders will probably put more attention to the reason behind their decision.

191

For the second day in a row,the GBP bulls went to work, as pound pairs found themselves hitting two-week highs! The GBPUSD closed at 1.5326, up over 70 pips for the day.

The rise of the pound was due to some encouraging data released yesterday. First, the UK labor market finally got some good news, as the Claimant Count change report came in much better than expected. The report indicated that the number of people who filed for unemployment benefits fell by 32,300 after consensus was for a rise of 8,200. Furthermore, last month’s claims were revised down from 23,500 to just 5,300!

Also released yesterday was the minutes of the latest MPC meeting. One interesting issue that was brought up in the MPC minutes was the issue of new inflation risks. Rising inflation? Is it time for a rate hike!? Not so fast my young padawans – the BOE is still pretty cautious about the overall state of the economy. The BOE needs to see more signs before they will even begin to whisper the possibility of a rate hike.

On deck today, we’ve got the Public Sector Net Borrowing account figures due at 9:30 am GMT. The account measures how much the government has been spent or saved in the past month. It is expected that a deficit of £14.6 billion will be posted.

Later on at 11:00 am GMT, the CBI industrial orders expectations index is scheduled for release. Forecasts are for a score of -33, still below the baseline 0 mark. However, the index has been showing improvement over the past few months. If we see a much better than expected reading, who knows what might just happen in the markets… Another round of pound buying perhaps?

192

The pound weakened yesterday as the public sector net borrowing for February pushed the UK’s debt to GDP ratio much higher. As a result he cable slid to the 1.5300 area while the guppy fell to a low of 127.03.

Public sector net borrowing amounted to 12.4 billion GBP in February, bringing the government’s total borrowing to 131.867 billion GBP this year. Despite these eye-popping figures, pound bulls were able to take comfort in the fact that the government’s debt is still under the projected 170.4 billion GBP deficit for the first quarter of 2010.

The UK won’t be releasing any economic reports today but watch out for BOE monetary policy committee member Paul Tucker’s speech at 10:35 am GMT.

193

After starting the week strong, the pound eventually squandered its huge lead to close the week behind the USD and JPY. It’s only win came over the debt-stricken EUR with the EURGBP slipping to 0.9012 from 0.9079. The GBPUSD, on the other hand, fell and closed at 1.5013 after reaching a high of 1.5383 from 1.5176. Similarly, the GBPJPY sunk to 135.93 from 137.86.

No economic reports were due in the UK last Friday. The pound, however, suffered a huge loss when India’s surprise interest rate hike sparked some speculation that the tightening measures that are starting to be implemented by the central banks in the world could constrain the global economic recovery.

Today (4:30 pm GMT), BOE Governor Mervyn King is set to speak at the Royal Society, in London. Being the head of the central bank, traders could then look into his speech for clues regarding the bank’s future monetary policies. Any hawkish statement could be bullish for the GBP.

Tomorrow, the UK’s annualized CPI for will be issued. The UK’s annualized headline CPI is seen to cool down a bit to 3.1% in February from 3.5%. The core version of the account is also seen to be at 3.0% from 3.1%. An interest rate hike or a removal of any of the BOE’s current stimulus programs would be less likely given a drop in the UK’s inflation figures. This, though, could be bearish for the GBP.

The UK’s BBA mortgage approvals and CBI realized retail sales will also be released during tomorrow. The latest number of new mortgage approved for home purchase is seen to be at 34,300. The UK’s CBI realized retail sales index, on the other hand, are seen to have dropped to 20 from 23 which indicates a slightly lower level of sales during the latest period.

On Wednesday, the UK’s annual budget balance will be published. The British government is not expected to cut on its deficit for this year. This will only put more pressure on the GBP given its already high outstanding debt.

The UK’s retail sales will be on tap on Thursday. Sales at a retail level are projected to have increased by 0.6% in February after sliding by 1.8% during the previous month. With the CBI retail sales index seen to have fallen, the UK’s actual retail figure could come in weaker than expected as well.

194

The GBPUSD turned out to be one of the stronger currencies in yesterdays trading session. It closed the US session just a few pips above the 1.5100 handle, around 100 pips from its Asian session open price.

There is a bunch of data to watch out for today, so be on your toes.

The UK’s consumer price index kicks the party off at 5:30 pm GMT. The expectation is that prices increased by 3.1% in February, slightly lower than the previous month’s 3.5% rise. Meanwhile, the core version of the report that excludes the prices of volatile items such as food and energy is predicted to show a climb of 3.0% in prices.

Keep a close eye on the actual results of the report because the BOE said earlier today that inflation could tick down a couple of notches as economic conditions remain weak. Low inflation would give the BOE more reason to keep interest rates accommodative at 0.50%.

Also released at the same time is the BBA mortgage approvals report. It is predicted show that 34,300 mortgages were approved in February, down the 35,100 from the previous month. Generally speaking, rising mortgages reflect how financially stable consumers are because people need to first be financially qualified to take out mortgages.

Lastly, at 11:00 am GMT, the CBI Distributive Trades survey is due. The consensus is a reading of 18 for this month, up from February’s 23. A reading above base line zero means that the sales volume of retailers and wholesalers are growing.

195

The pound slid lower on a round of bad news yesterday, preventing it from capitalizing on its rise on Monday. The GBPUSD pair fell about 50 pips from its opening price to end the day at 1.5048.

The CPI report was released yesterday and as expected, failed to impress. The annualized rate fell to 3.0%, much lower from the 3.5% figure posted last month. Why is this significant? Well, this gives the BOE more room to breathe for its quantitative easing measures. While inflation is still above the BOE’s target rate of 2.0%, some economists have said that they expect inflation to be subdued and that it will eventually below that threshold.

Furthermore, this may eventually allow the BOE to even expand their asset purchase facility and not worry about keeping rates at low levels for an extended period. This in turn could lead to bearish sentiment towards the pound over the next few months… which is probably what the BOE wants! As Forex Gump said in a recent post, the BOE may actually want the pound to weaken in order to help their debt problems…

Meanwhile, the UK housing market got a bit of good news, as mortgage approvals were at 35,300, higher than the projected figure of 34,300.This marked the first increase in 3 months.

Still, the markets really didn’t mind this data too much, as once again, they focused on the bad news that came in the form of the CBI realized sales index. The index failed to hit the consensus reading of 18, printing a score of 13. This indicated that sales volume is dropping and that consumer spending in the UK is still weak.

Today, we may see quiet trading during the earlier parts of the European session, as traders may be gearing up for the release of the annual budget. Remember, the UK government is neck deep in debt - if there are signs that their debt levels will only grow this year, it could trigger another round of pound selling.

196

Risk aversion and weak fundamentals clobbered the pound yesterday, pushing the cable to a low of 1.4877 during the US session. The guppy was a bit more fortunate since it was able to keep its head above the 136.50 level.

The UK’s annual budget report revealed that the government downgraded their 2011 growth forecasts from 3.5% to 3%, leading to a pound sell-off. Although the government announced that they’d need to borrow less funds this year, the pound was unable to recover as risk aversion spurred by Portugal’s debt downgrade weighed it down.

The retail sales report is set for release at 9:30 am GMT today. An increase of 0.8% in retail sales is expected to follow the 1.8% slide seen last January. Given the recent slump in the CBI realized sales figure, the pound might be in for another disappointing result. Would it follow the euro in chalking up a new ten-month low?

197

Put another mark at the pound’s lose column. The pound suffered another defeat against the greenback in yesterday’s foreign exchange tug-of-war. The GBPUSD fell to and settled at 1.4813 after touching a high of 1.5003 from 1.4866.

The UK’s retail sales for the month of February surprisingly rose by 2.1% versus the market’s estimate of 0.8%. This jump was buoyed by the 11.2% increase in sales at household goods stores. Vehicle fuel sales also gained by 9.1% during the month. Sales during the month of January, however, was revised down to -3.0% from -1.8%. The adverse winter condition in January was to blame why the consumers couldn’t go out and spend at that time.

The pound gained some support following the report. The sellers, though, took this as an opportunity to get a better price to short the pound again.

No major economic reports are due today in the UK. Today, though, is EU Summit’s second day of talks. Yesterday, ECB President Trichet welcomed a solution for Greece’s debt issues. Any positive developments in the summit could reflect in the pound as well.

198

Thanks to “positive” news from euro zone, the Cable was able to retrace some of its losses last Friday. From Asian opening price that day of 1.4810, the Cable managed to rally and close out the week just a couple of pips below the 1.4900 handle.

For today, watch out for the net consumer credit report. The report, which measures the monthly change in the total new loans issued to consumers, is predicted to show a rise of 400 million GBP for February, slightly lower than the 500 million GBP increase the month before. Because being able to secure loans require financial stability, currency traders typically see rising loans as good for the economy.

We’ll be seeing more data from the UK as the week rolls along.

On Tuesday, the Nationwide house price index (7:00 am GMT) and UK’s current account balance (8:30 am GMT) are due. The Nationwide HPI is expected to show that the selling price of homes rose 0.2% this month, opposite the 1.0% decline seen last February. Meanwhile, the current account balance is predicted to show a 4.6 billion GBP deficit for the final quarter of 2009, slightly lower than the 4.7 billion GBP deficit from the quarter before.

On Thursday, the UK’s manufacturing purchasing managers’ index will come out. The PMI basically assesses whether the manufacturing industry is growing or not. A reading above the “line in the sand” figure of 50 indicates growth while a reading below 50.0 means otherwise. The consensus is a reading of 56.8 for March, a very slight improvement from the previous month’s 56.6.

199

Up and down trading for the pound yesterday, although it remained within range considering how volatile GBP pairs are. After covering the weekend gap, the GBPUSD closed slightly higher, finishing the day at 1.4982.

The United Kingdom got a bit of good news yesterday, when net consumer credit figures came in slightly better than expected. ₤500 million worth of loans were issued to consumers last month, which beat consensus of a ₤400 million. This indicates that consumer access to credit is improving, which is a sign of financial stability.

However, the boys over at S&P still seem unimpressed, as they are maintaining their negative outlook on the economy. They warned yesterday that if the UK doesn’t fix its debt problems, it may not be deserving of its AAA rating. I don’t really blame them though – things haven’t been looking too rosy for the UK.

One thing to keep an eye on is developments in the political arena. As I’ve pointed out in the past, one reason why analysts are bearish on the British economy is because of the possibility of a hung parliament. What this means is that there could be no majority or ruling party in the UK government. How does this affect the economy? Well, one issue that the government needs to deal with is their growing debt. If government is split, then there could be a drag in coming up with any plans to address the debt problem.

In any case, Chancellor Alistair Darling will be speaking today at 8:45 am GMT. He may drop some comments regarding the S&P’s statements, so watch out for his speech.

Today we could be in for some major moves, as final GDP figures are due at 8:30 am GMT. No revisions are expected to be made from the last report, which indicated that the UK economy grew by 0.3% during the last quarter of 2009. However, if we do see a downward revision, all hell might break loose…

The Nationwide HPI report is also due at 6:00 am GMT. The index measures the change in selling prices of homes, and it is projected that housing prices rose by 0.2% in the past month.

Lastly, the current account is also scheduled for release at 8:30 am GMT. The deficit for the last quarter is expected to be at ₤4.6 billion, just slightly less than the previous quarter’s figure of ₤4.7 billion. Just recently, my main man Forex Gump made wrote a post about how the BOE actually wants a weaker pound in order to boost exports. Now, seeing as how the pound has been falling the past few months, could we see an upside surprise, and possibly even a surplus in today’s report?

200

Strong economic data propelled the GBPUSD to a high of 1.5127 yesterday, allowing the pound to erase its losses from last week. The GBPJPY also edged higher, reaching a high of 140.56 and marking its seventh day in consecutive rallies.

The Nationwide HPI printed a 0.7% increase in house prices for March, outpacing the consensus of a 0.2% uptick. This was a solid rebound from the 0.8% slide seen in February. It turns out that home owners postponed listing their properties online, causing housing demand to climb.

Meanwhile, the fourth quarter GDP enjoyed an upward revision from the previously reported 0.3% to 0.4%. The pound then banked on the news that the UK’s economic expansion was slightly stronger than initially announced.

Furthermore, UK’s current account balance came in better than expected as the deficit narrowed from 5.9 billion GBP to 1.7 billion GBP in the fourth quarter. The smaller deficit was mostly a result of a higher surplus in income and trade services for the period.

The only disappointing piece of economic news from the UK yesterday was its GfK consumer confidence reading. The report showed that consumers were a bit more pessimistic in March as the index unexpectedly dipped from -14 to -15. The pound pairs retreated after the release of this report but were able to get back on their feet immediately.

Looking ahead… Well, the economic coast is clear for the UK, at least for today. It’s next set of economic reports which are due Thursday include the Halifax HPI, manufacturing PMI, and BOE credit conditions survey. Would we see another wave of upbeat figures from the UK? Stay tuned!

201

The pound extended its winning streak against the dollar and yen yesterday to four and six, respectively. The Cable (GBPUSD) rose to and closed at 1.5174 from 1.5069. The Guppy (GBPJPY) also reached 141.87 from 139.83.

The UK did not release any economic reports yesterday. Risk appetite in the forex market, however, drove the anti-dollars like the pound higher.

Today at 8:30 am GMT, the UK’s manufacturing PMI for the month of March will be published. The index is seen to rise to 56.8 from 56.6. An increase in this account indicates an improving business condition in the UK’s manufacturing sector and therefore would usually be bullish for the GBP. It looks like the GBP bulls will be celebrating again if the index comes in at least in line with expectations.

202

Thanks to improved risk appetite, the GBPUSD was one of the greatest performers last week, rising up more than 250 pips to close out last Friday above the 1.5200 handle. Given the strong case of risk appetite, would we see the GBPUSD stage another stellar rally this week?

The only obstacle that held back the GBPUSD’s advance last week was the worse-than-expected results of the US non-farm payrolls report. It came out with a reading of 162,000, lower than the 185,000 gain initially predicted. This dampened risk appetite, causing the GBPUSD to fall 100 pips to 1.5200 from its highest price level last week.

No data is expected out of the UK today, but expect a lot of economic events, particularly the BOE’s interest rate decision, are coming up ahead.

First up, the Halifax Bank of Scotland house price index, will be released either tomorrow or on Wednesday. The report, which measures the change in the selling prices of homes funded by the HBOS, is expected to show 0.6% increase in March, opposite the 1.5% decline from the month before.

On Wednesday, at 8:30 am GMT, UK’s services purchasing managers’ indexwill be released. The services PMI is designed to see whether UK’s services sector is growing or not. A reading above 50.0 indicates expansion while a reading below 50.0 means otherwise. The forecast for March is a reading of 58.2, slightly lower than February’s 58.4.

On Thursday, UK’s manufacturing production report and the BOE’s interest rate decision are due. The manufacturing production report, which will be published at 8:30 am GMT, is predicted to show a 0.7% rise in February after dropping 0.9% the month before. On the other hand, at 11:00 am GMT, the Bank of England will announce its decision on interest rates. As usual, it is widely expected for the BOE to keep rates steady at 0.50% and hold off expanding its quantitative easing program.

It looks like a lot of positive expectations for economic data this week… If we see these reports come out on target, or even better-than-expected, we could see another run in risk appetite, which would help the GBPUSD regain the losses it experienced during the first quarter of 2010.

203

Relatively tight trading on the cable yesterday, as it stuck within a range of about 80 pips. With some economic reports on deck today, could we see some stronger moves?

At 8:30 am GMT, the construction purchasing manager index is scheduled for release. The index measures the confidence of business managers in the construction industry, with 50.0 being the score that separates contraction from expansion. Projections are for a reading of 48.8, which would be a slight improvement over last month’s release of 48.5. Now, if the index comes in to post a score above 50.0, indicating actual expansion, this could send GBP bulls jumping for joy!

Later on at 11:00 pm, the nationwide consumer confidence index is due. The index has been steadily improving the past few months, printing a score of 80 last month. Today’s release is projected to come out at 81. Have consumers become confident over the economy? Or have they become more concerned, especially given the uncertainties in the political arena? We will have to wait and see!

Tomorrow will be busy once again, as both the Halifax housing price index and the services PMI reports are due. Housing prices are seen to have risen by 0.6% in the past month, while the services PMI is expected to have remained relatively steady with a reading of 58.2. Normally these are considered to be high impact reports, but it will be interesting to see the markets react to them. After all, we’ve got the BOE’s interest rate decision coming in on Thursday…

204

V for victory! The pound successfully pulled up from its sharp dive against the greenback and etched a nice V-formation on the GBPUSD 1-hour chart. The question is: Would the pound be able to sustain its rally or would it resume its dive later on?

Earlier during the day, UK Prime Minister Gordon Brown announced that the general elections will be held on May 6. This caused fears of a hung Parliament, wherein no political party holds majority of the seats, to resurface. A hung Parliament - no connection to William Hung whatsoever - is an unfavorable political situation since split decisions between the House members could delay important government decisions.

Fortunately for the pound, UK’s construction PMI came in better than expected. The March reading climbed from 48.5 to 53.1, past the 50.0 mark which indicates that the industry is expanding. This marks the indicator’s 2-year high as new orders for housing and commercial sectors surged in March. As a result, the GBPUSD landed back above the 1.5200 mark and climbed higher after the US Fed delivered skeptical comments concerning their monetary policy.

It’ll be the services sector’s turn to release their March PMI reading today at 4:30 am GMT. The PMI could dip from 58.4 to 58.1, implying that the expansion in the industry slowed a bit during the month. A weaker than expected figure could force the pound to return its recent gains.

205

The pound received another pounding from the yen and the greenback yesterday. The Guppy (GBPJPY) fell and closed at 142.26 from 143.17. The Cable (GBPUSD) also slid to 1.5247 from 1.5279.

The UK’s services PMI dipped more than expected to 56.5 in March from 58.4, indicating that the growth in the UK’s service sector had slowed. Services grew at its highest rate in February as businesses tried to get back on the game after being benched by the harsh winter conditions. Activity, however, dipped in March when new businesses were a lot lesser than projected.

The pound weakened following the report.

The UK’s Halifax HPI and February industrial and manufacturing production will be on tap later at 8:30 am GMT. House prices are seen to have gained by 0.65 after dipping by 1.5% during the previous month. Both industrial and manufacturing productions are also expected to have risen by 0.5% and 0.7%, respectively. Positive results in these accounts could halt the pound’s present decline.

  The market will probably focus on the [Bank of England](http://www.babypips.com/forexpedia/BOE)’s [interest  rate](http://www.babypips.com/forexpedia/Interest_rates) and asset facility program decision today at 11:00 am GMT though.  The bank is seen to maintain its interest rate at 0.50% and its asset  purchase facility program at £200 billion. According to some economists,  the bank is likely to hold their easing programs until November since  the economy is still in a fragile condition. They said that it is vital  for the bank to keep the interest rate low in order for the economy to  sustain its recovery. Doing so, however, would be bearish for the GBP.