Daily Economic Commentary: United Kingdom

Trading Discussion News and Economy
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The user-error, together with the prospect of a hung parliament and worse-than-expected results on UK’s services PMI (55.3 actual vs. 57.1 forecast), provided the fuel for the pound bears to take the currency lower across the board.

The GPBUSD opened 1.5158 and was sold-off throughout the day to close out the US trading session at 1.4852, marking a new year-to-date low in the process. The GBPJPY, on the other hand, fell to 134.04 from its Asian open price of 141.56. And no, that’s not a typo.

There are some economic data on UK’s cupboard but they might take a backseat because of the ongoing parliament election. In any case, the market expects that the Halifax house price index, which will be released later at 8:00 am GMT, to show a 0.6% rise in prices in April, roughly half the increase seen the month before.

As for the producer price index, which will be released 30 minutes after, is predicted to show that the price of goods and raw materials usually bought by manufacturers grew by 1.0%, down the 3.6% from the month before.

Hmm, given the market’s aversion toward risk and the uncertainty surrounding UK politics, we could see the pound weaken again today. Still, with the US non-farm payrolls coming up, anything could happen! As always, keep those money management rules in check!

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After dipping to a yearly low at 1.4477, the GBPUSD has recovered, now hovering just above the 1.4800 handle. Now that we’ve got a hung parliament, will the pound get left out to dry?

As expected, the Conservative party came out on top, but failed to win a majority of the seats in Parliament. This means that we now have a hung parliament. This has been a cause of concern for traders, as many see this scenario as a stumbling block in the government’s quest to solve the UK’s debt problems. They fear that with no majority party in power, political parties will now refrain from working hand in hand to pass legislation that would be geared towards lowering UK debt levels.

Still, there are some signs of hope. David Cameron, the leader of the Conservatives and likely new Prime Minister, has reportedly offered the Liberal Democrats (another political party) a chance of an alliance, in order to create a united government front. Talk about having initiative! This is good news, as it would help ease concerns that government will not be able solve all the problems plaguing the UK economy. Let’s see how this all plays out over the next couple of weeks.

In other news, the Halifax and producer price index reports that were released last Friday came in slightly disappointing. The Halifax report showed that the UK housing market is still unstable, as housing prices reportedly fell by 0.1% last April. Meanwhile, producer prices rose by just 0.6% during the same month.

Take note however, that prices at which producers sell their goods rose by 1.4% in the same month, the highest increase in more than 2 years. Could this be a sign that inflation is rising? Could this give the Bank of England a reason to hike rates?

Speaking of interest rates…

We could be in for more volatile moves today, as the BOE will be releasing its MPC statement. Word on the street is that the central bank will be keeping its asset purchase program at 200 billion GBP, while keeping rates at 0.50%. Given all the uncertainty in the markets and with the recent developments of the euro zone debt crisis, it’s no surprise that BOE would remain cautious. Look out though, for any hawkish comments that may hint that the BOE is closer to hiking rates.

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The pound tossed and turned yesterday, with the cable enjoying a quick stay above the 1.5000 handle before quickly erasing its gains. Meanwhile, the guppy broke above the psychological 138.00 resistance, hit a high of 140.59, then retreated back to 138.00.

While attempting to get back on its feet, the pound suddenly slipped when British Prime Minister Gordon Brown offered to step down from his post so that the Labor party and the Liberal Democrat party could form a coalition. A few days after the UK’s elections resulted to a hung parliament as many feared, negotiations for alliances among the parties have been ongoing in order to form a majority. Right now, the Labor party and the Conservatives are taking turns wooing the Liberals for an alliance. And with Brown volunteering to resign as both leader of the Labor party and as Prime Minister, the Labor party could formally begin negotiations with the Liberals. However, the pound didn’t seem too pleased with this…

The BOE’s monetary policy statement yesterday seemed to take a backseat as the aftermath of the UK elections stayed under the spotlight. Besides, it’s not like the central bank did anything to surprise the markets anyway. As expected, the BOE maintained their 200 billion GBP asset purchase facility and kept their interest rate on hold at 0.5%.

Today, the UK is set to release its manufacturing production figures for March. After rising by 1.3% in February, a lower increase of 0.3% is expected in the next month. A stronger than expected result could push the cable back above the 1.5000 handle. Also due today is a GDP estimate from the National Institute of Economic and Social Research.

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As we all know, politics has been driving the pounds price action lately. Yesterday was no different, as the GBPUSD was able to find some buying support when news hit the airwaves that the talks between the Labor party and the Liberal Democrats to form a coalition broke down.

This was taken by traders a positive for the pound, as they seem to favor to see the Conservative party in power, and not the Liberal Democrats. With the said, David Cameron was proclaimed as new prime minister, which gave the chance for the pound to post its first day of gains in more than one week. It looks like the next step for the UK government would be cutting its huge budget deficit.

Economic data released yesterday also gave the pound bulls additional fuel. The manufacturing production report for March beat forecast by a large margin, showing a 2.3% rise instead of the mere 0.3% initially expected. Meanwhile, NSIER estimated that UK grew 0.5% in April, which is an improvement from the 0.2% expansion from the previous month.

For today, watch out is the jobless claims change at 8:30 am GMT. The report, which measures the change in the number of people who claimed for jobless insurance, is expected to show a 20,000 decline for the month of April. Meanwhile, the unemployment rate is predicted to have remained at 8% in March.

Also keep an eye and an ear out for the Bank of England’s inflation report and press conference an hour after, at 9:30 am GMT. Like in the past, traders will be watching it closely because it outline’s the bank’s outlook on inflation and economic growth prospects. This could be used as a way to predict future monetary policy, and therefore, the pound’s long-term price action.

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Looks like yesterday’s happy hour at the pub was short lived! After zooming higher at the start of the European session, the GBPUSD dropped like someone who had one too many drinks for the night! The pair eventually closed shop down over 100 pips for the day.

The tipsiness of the pound started once the Bank of England released its inflation report. In the statement, BOE officials downplayed the recent concerns of rising inflation, expecting inflation to be within the central bank’s 2% target for the next two years. What did traders think of this? That’s right – an extended period of low interest rates!

In addition, BOE Governor Mervyn King expressed concern over short term growth prospects, while also commenting that Greece’s debt woes could negatively affect the UK economy. It seems to me that the King and his monetary policy men are still quite cautious and feel that the economy is far from stable.

King did however, express a vote of confidence towards the alliance being formed between newly-elected Prime Minister David Cameron’s Conservative Party and the Liberal Democratic Party. In the past, King had been lobbying the British government to get their spending under control. He even pointed his finger to Greece as example of what may happen when you spend too much money on candy!

I suppose King was satisfied to hear that the Conservative Party has come up with a proposal to cut government spending by six billion GBP during the upcoming fiscal year. Let’s see how the British public reacts to the proposal. If this proposal can be passed quickly by Parliament, it may just give the indication that government parties are indeed putting their differences aside and working hard towards solving the UK economy’s problems.

In other news, we got some mixed data from the labor market. First, jobless claims dropped by 27,100 in the past month, after claims were expected to dip by 20,000. However, the unemployment rate remained steady at 8%, as with the number of unemployed now at 2.51 million. With a new government in place, it’ll be interesting to see what Cameron and the rest of his Tories have planned to alleviate this.

The only red flag going up today from the UK is trade balance figures due at 8:30 am GMT. Word out of the British channel is that a deficit of 6.5 billion GBP was recorded for the month of March. If we see a worse than expected figure, it would signal that export demand is still weak, which would be bearish for the pound.

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The pound took a beating yesterday after the UK released a weaker than expected trade balance report for March. Because of that, the cable dropped by more than 300 pips while the guppy crashed below 136.00.

UK’s March trade deficit widened from 6.3 billion GBP to 7.5 billion GBP, far worse than the consensus of 6.5 billion GBP. Components of the report revealed that imports chalked up a 5.2% increase during the month, outpacing exports which rose by merely 1.2%. Although the BOE expects the weakening pound to boost exports and spur an improvement in their trade balance for the coming months, the disappointing headline figure sparked a sell-off in the pound.

It didn’t help that the UK was in the midst of a transition now that Conservatives leader David Cameron just took over former Prime Minister Gordon Brown’s post. This political uncertainty probably made traders more uneasy about buying up the pound, causing the cable to edge closer to the 1.4500 handle. With no top-tier reports on today’s docket, the pound could continue to sell-off based on this bearish sentiment for the UK.

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After two straight days of massive losses, the GBPUSD was able to hold its head above water last Friday. The pair held on for dear life and ended the week just a couple of pips above the 1.4500 psychological support level.

Earlier today, however, the GBPUSD broke 1.4500 and sunk to new yearly lows when the Rightmove house price index came in with a dismal figure. It revealed that prices only rose 0.7% this May, a little over a fourth of the 2.7% gain seen last month.

UK’s economic calendar this week presents a couple of red flags.

Tomorrow, at 8:30 am GMT, UK’s consumer price index will be released. It is expected to show that prices rose 0.6% April-on-March. Year-on-year, however, this translates to a 3.5% increase, well above the Bank of England’s 2% yearly inflation target. Despite this, I don’t think the BOE’s is ready to hike rates, especially since UK’s economy remains pretty frail. Rising inflation, high unemployment, weak growth… This is sounding more and more like a case of stagflation to me…

In any case, we’ll just have to see what the BOE’s monetary policy committee thinks of the situation on Wednesday, when the bank publishes the minutes of their most recent interest rate meeting. Watch out for the report, as it outlines the bank’s take on the economy.

Lastly, on Thursday, UK’s retail sales report will be released. The expectation is a rise of 0.2% in March, half the 0.4% increase in April. If the actual figure comes in lower, the pound would most likely drop, just like in the previous months.

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After tumbling as low as 1.4252 in intraday trading and hitting 14 month lows, the GBPUSD rallied back, erasing most of its losses for the day. The pound was able to edge back up to end the day at 1.4476. Are there any sellers left?

The pound bounced back up midway through yesterday’s trading session on comments made by new Prime Minister David Cameron. Cameron made some pretty harsh comments about how the Labour Party (the previous political party in control) handled government finances under the leadership of Gordon Brown. Remember, Cameron and the Conservative Party based their whole political campaign on fiscal reform. The markets seem to take his comments as a sign that there will indeed be major changes in the coming months.

Looking ahead, we’ve got inflation data on deck at 8:30 am GMT, when the consumer price index will be released. Initial estimates are that consumer prices have risen by 3.5% since a year ago. As I said yesterday, this is above the Bank of England’s target inflation rate of 2%. If the report comes out today to show that prices are rising faster than anticipated, it may lead to another round of pound buying.

How come? Well, a faster pace of inflation would give the central bank reason to hike interest rates or cut back on quantitative easing measures. Still, I’m a little skeptical on whether or not the bank would actually do so. After all, the UK economy has been struggling. But of course, seeing as how jumpy traders are as of late, they may just jump on any good news that comes their way!

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And we’re back to regular programming! After allowing the pound to pull up a bit, traders slumped back to their risk-averse selves and caused the cable and the guppy to resume their declines.

Not even an extra strong dose of inflation could get the pound pumped up yesterday. UK’s April CPI posted a year-over-year rise of 3.7%, marking its 17-month high. Uh oh, this means that annual inflation already exceeded the central bank’s target and may require a monetary policy adjustment. Aside from that, retail prices rose by a whopping 5.3% while core prices climbed by 3.5%.

However, BOE Governor Mervyn King seemed unfazed since he claimed that the sudden surge in inflation was only temporary. Because the BOE expects inflation to tone down later on, a tightening monetary policy move isn’t likely to happen soon.

The release of the BOE’s latest monetary policy meeting minutes could shed more light on the policymakers’ outlook for inflation. It seems that most policymakers are concerned that tightening their monetary policy to keep inflation in check would only hurt consumer activity and eventually dampen their already feeble economic growth. On the other hand, some argue that inflation could keep climbing uncontrollably unless they withdraw some of their stimulus soon. That should make for an interesting debate so watch out for this report due 8:30 am GMT today.

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For the fourth day in a row, the pound was unable to bust out of its range. The GBPUSD ended the US trading session at 1.4392, barely 20 pips lower from its Asian session opening price.

The forecast on the retail sales report was right on target, which kept volatility contained. The report revealed that sales grew only 0.3% in April, slightly lower than the 0.5% gain seen the month before (revised up from 0.4%).

For today, watch out for UK’s public sector net borrowing report at 8:30 am GMT. The report is expected to show that UK’s budget deficit stood at 11.1 billion GBP in April, more than half the deficit seen the month before. UK’s bulging deficit has been the focus of traders as of late, which could mean that the report later could create quite a hefty market impact. If the actual result later comes with a higher-than-expected deficit, we could see the GBPUSD get sold off like hot cakes and bust out of its range!

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Even though the cable stayed range-bound last Friday, it managed to edge higher and close a few pips shy of the psychological 1.4500 handle. The guppy was also able to erase some of its recent losses as it landed back above 130.00.

Surprisingly, the pound was feeling a bit lighter before the week came to a close. Aside from the rebound in risk-taking, better than expected economic reports also provided support for the pound. UK reported a 10 billion GBP budget deficit for April, which was less than the expected 11.1 billion GBP shortfall. This was accompanied by a sizeable downward revision in the budget deficit for the last fiscal year, suggesting that UK’s debt is not so bad after all. Still, the new coalition government feels the pressure to cut down on spending and trim its deficit.

Aside from that, business investment saw a 6.0% increase for the first quarter of the year instead of the estimated 0.5% decline. This uptick, which was led by a rise in investments in the services sector, was the first positive reading in two years.

Mortgage approvals, on the other hand, came in weaker than consensus. Instead of climbing from 51K in 54K in April, mortgage approvals fell to 47K, its lowest level in almost a year. This worse than expected figure was possibly a result of tight credit conditions in the UK.

Up ahead, the UK has a few more top-tier reports due. Tomorrow, the revised first quarter GDP reading will be released and is expecting an upward revision from 0.2% to 0.3%. Another mortgage approvals report, this time compiled by the British Bankers’ Association, is on tomorrow’s docket.

On Wednesday, the Nationwide house price index is on tap. The report is expected to show a 0.5% increase in house prices during the month of May, which would be half as much as the rise seen in April. The CBI realized sales and GfK consumer confidence report are due Thursday. Would these upcoming releases be enough to push the cable out of its range? Stay tuned!

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It looks like the Cable is really holding on to its range! After spiking briefly above the 1.4500 handle during the European trading session, the bears saw quickly jumped in and took the Cable lower. It ended the US session at 1.4433, 35 pips lower from its opening price this week.

The likely cause for the Cable’s drop was the reemergence of risk aversion… again. Apparently, CajaSur, a major commercial bank in Spain which lost 426 million EUR in revenues in 2009, was seized and taken over by Spain’s central bank.

Today, at 8:30 am GMT, two important economic reports will come out.

The first one is UK’s second estimate on its GDP. According to the preliminary report, UK’s economy only grew by 0.2% during the first quarter of this year. Economists are expecting this figure to be revised up to 0.4%. The positive expectations on the secondary GDP report could provide some intraday support for the pound.

The second one comes in the form of the BBA mortgage approvals. It is expected to report that 37,600 mortgages were issued in April, up the 34,900 figure seen the month before. Rising mortgages is usually seen as positive for the economy because it indicates that more and more people are eligible in taking out loans.

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Ranging, ranging, ranging! The GBPUSD has been stuck in a range the past two weeks now, bouncing between 1.4250 and 1.4500. Will this be the recurring theme this week?

The pound dropped throughout the day, as risk aversion continues to dominate traders mindsets. Some have suggested that the tension between North and South Korea has caused traders to become jittery. Now, I’m not too sure if this was the actual cause, but it’ll be interesting to see how this develops down the road. With traders jumping all over any bad news, if this situation continues to worsen, we could see more traders move their assets away from higher yielding currencies like the pound.

And now, on to some economic data and news…

GDP figures released yesterday came in line with expectations, as first quarter growth was revised up slightly to 0.3%. While this was somewhat good news, you have to remember that the previous quarter, the UK economy grew by 0.4%. In addition, government spending rose by another 0.5%, which put spending up 3.1% from a year ago. This indicates that the growth of the economy has been fueled by government spending.

Hmmm, isn’t newly elected Prime Minister David Cameron vowing to cut budget spending? The economy is already showing anemic growth and if the government has to cut its spending (and it does!), now what? Another round of contraction later this year perhaps?

No major data coming out today, so may see more range bound motion on pound pairs. Just be careful out there and stay on top of the news – as I always say, risk sentiment can change on a dime so watch out and keep those risk management rules in check!

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For the eighth day in a row, the cable stayed inside its range between 1.4250 and 1.4500. The guppy’s movement was also relatively calm as it paced back and forth between 129.05 and 130.65.

The BBA mortgage approvals report showed that only 35.7K home loans were approved in April, which was less than the estimated 37.6K. Still, home loans in April were a tad higher than the 35K mortgages approved last March, reflecting a slight improvement in housing demand during the month. On an annual basis, mortgage approvals are down by 22%, which means the UK’s housing sector is still weak.

The pound was able to hold on to its recent gains after the Organization for Economic Cooperation and Development suggested that the BOE must raise its benchmark rate by the end of the year. They pointed out that UK’s annual CPI already exceeds the central bank’s target and that tightening measures are necessary to keep inflation contained. However, the BOE maintained that inflationary pressures are expected to tone down soon, which would eventually bring their CPI within the target range. Well, it seems that the OECD and the BOE have opposing perspectives when it comes to inflation and policy measures, leaving traders uncertain where to take the pound.

Today, a couple of important economic reports are due from the UK. First, the CBI realized sales report, an indicator of consumer spending, is set for release at 10:00 am GMT. The reading for May is expected to hold steady at 13, which implies that the level of sales volume didn’t change during the month. Later on, at 11:00 pm GMT, the GfK consumer confidence index will be reported. The index could climb up a notch from -16 to -15, indicating that consumers were slightly less pessimistic this month. Better than expected results could give the pound enough energy to bust out of its range so stay tuned for those reports!

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Risk off, risk on… Thanks to improved risk appetite, the Cable was finally able to bust out of its range. The Cable spiked above 1.4600 temporarily before settling at the 1.4550 region at the end of the US trading session. The Guppy, too, followed suit and finished the day more than 300 pips higher at 132.70.

The burst in risk appetite was spurred by China’s denial that it plans to dump its euro zone debt holdings. China said the rumors were “groundless” and that Europe remained to be one of their main investment markets.

While all that risk taking was going on, the UK was able to sneak in a not-so-good piece of data. I’m talking about their distributive trades survey, which came with a reading of -18, completely opposite the +16 initially predicted. This meant that the sales volume of both retailers and wholesalers was lower this month than in April.

Even though no data is scheduled for release from UK today, we still may see the pound produce some one-directional moves. It is a Friday, which means currency traders may start taking profit and close up shop for the week. Be careful out there!

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After testing the 1.4600 late last week, the GBPUSD came back down to earth and is now hovering just below the 1.4500 handle. With a slew of high impact reports coming out around the world this week, it could be a make or break week for those GBP bulls!

No data came out last Friday from the UK, but that didn’t stop the pound from taking a hit. Risk aversion took its toll on the markets as Fitch downgraded Spain’s sovereign debt rating. Ummm, doesn’t the UK have some serious debt problems as well? Hmmm… I wonder what the new British government is going to do about this. That’s right, I’m talking to you Mr. David Cameron! It look like you got your work cut out for you! Who knows, the UK might be next in line for a downgrade!

We may see continued range-bound trading in the GBPUSD today, as UK traders won’t be sitting on their buttocks all day as they’ll all be off for the long weekend. This however, shouldn’t remain the theme for the rest of the week, as we’ve got a couple of red flags coming out.

Tomorrow, the manufacturing purchasing manager’s index is scheduled for release at 8:30 am GMT. The index is expected to print a reading of 57.8, slightly lower than May’s release of 58.0. The report surveys business managers across the country on their thoughts of market conditions. A lower score would indicate that business managers are slightly less optimistic about the economy.

Throughout the week, we’ll also be sprinkled with housing market data in the form of the Halifax (any day this week) and Nationwide (Thursday) housing prices index reports. The reports are expected to show that housing prices rose by 0.3% and 0.5% respectively. Watch out if data reveals that housing prices didn’t increase – it would signal more weakness in the housing market and give more reasons for the Bank of England to keep interest rates at current levels.

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Despite the US traders off on holiday, the pound still managed to muster up some strength and stage a rally yesterday. The Cable ended the day at 1.4542, up almost 100 pips from its week open price.

The only piece of data of interest today is UK’s manufacturing purchasing managers’ index at 8:30 am GMT. It is expected to print a reading of 57.9 for May, which is slightly lower from the 58.0 reading seen the month before. The report has created quite a hefty market impact in the past, so I suspect it will do the same again later. If the actual result comes in lower than forecast, we may see the Cable head back to the previous day’s lows.

Also, as I’ve cautioned in my other updates, watch out for some volatile moves today as traders come out from their long holiday weekend to the trading floors to do some… uh, trading!

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Despite the fresh round of risk aversion that hit the markets yesterday, the pound burst higher on good data that was released. The GBPUSD touched the 1.4700, marking the highest level its been at in two weeks. Can the sustain its gains?

Traders coming back from the long weekend got a nice welcome back present in the form of the manufacturing purchasing manager’s index, which came to have a reading of 58.0. Just in case you forgot, this matched March’s score which was a 15-year high! Based on this data, analysts believe that manufacturing will help GDP growth match the first quarter figure of 1.2%!

Traders also jumped on the pound bandwagon when rumors circulated that AIG rejected an offer from Prudential for one of its Asian insurance business segments. Just to make things a little clearer, let me explain:

AIG is a US based firm that owns business around the world. Prudential, a British company, is looking to buy AIA, a Asian insurance business, from AIG. In order to complete this sale though, Prudential would need to unload their pounds in favor of dollars. Because of the magnitude of the deal, this could adversely affect the pound as it could lead to a major sell-off. However, now that the initial offer was rejected, traders decided it was safer to buy up the pound, which helped its rise yesterday.

Today, housing market data will be available in the form of the construction PMI and mortgage approvals report at 8:30 am GMT. The construction PMI is expected to print a reading of 58.0, slightly lower than the previous month’s reading of 58.2. Meanwhile, the number of mortgage loans approved in April is forecasted to be at 49,000, just a tad higher than the 47,000 figure seen in March. If these reports come in better than expected, we may see another round of pound buying take place.

Credit information will also be released at 8:30 am GMT, as the Bank of England will be releasing net lending to individual figures. About 1.1 billion GBP worth of new credit is predicted to have been lent out to consumers in April, up from the 0.6 billion GBP lent out in March. A better than expected figure would reflect improving credit conditions.

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The Cable went into see-saw mode yesterday as it paced in and out of the 1.4700 psychological handle. It rallied as high as 1.4771 during the Asian session before completely reversing its gains to settle at 1.4665 by the end of the US trading session. The Guppy, however, was well bid, which enabled it to soar to 135.02 by the day’s end.

Data released turned out to be insignificant to traders as they hardly had any effect on price action. Nevertheless, here’s a quick recap of the results… The construction purchasing managers’ index printed a reading of 58.5, slightly higher than forecast. Meanwhile, the figure on mortgage loans approved was 49.87K, which was also higher than the 49.8K consensus.

Looking forward, now that the buying frenzy that stemmed from the AIG-Prudential deal has faded, it looks like the pound will be very vulnerable to selling pressures. If the data later comes in below, we may see a sharp sell-off in the pound. The first report, the Nationwide house price index, will be published at 6:00 am GMT. It is predicted to show an increase of 0.5%. The second one UK’s services purchasing mangers’ index. It will come out at 8:30 pm GMT and is expected to print a reading of 55.6.

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Even though UK’s economic data came in line with expectations, the cable was unable to make further headway as it retreated towards the 1.4600 area. Meanwhile, the guppy was unable to sustain its rally above 136.00 and pulled back to a low of 134.56.

UK’s services PMI stepped up a notch from 55.3 to 55.4 in May, signaling that the services sector expanded at a slightly faster pace during the month. However, components of the index revealed that firms started cutting jobs again. It turns out that employers grew increasingly worried about the stability of the UK economy, which is still adjusting to the new coalition government. On top of that, firms were wary that the UK government’s plans to reduce its public deficit could have a negative impact on their profits.

Meanwhile, Nationwide’s survey showed that house prices climbed by 0.5% in May, less than half the 1.1% increase seen in April. Despite this uptick in house prices, activity in the housing market remains subdued. The release of the Halifax house price index today at 8:00 am GMT could provide more details on the state of the UK housing industry. A rebound of 0.3% is expected for the month of May and a stronger than expected result could provide the pound some support.

Also, keep an eye out for the release of the US non-farm payrolls report at 12:30 pm GMT, bearing in mind how much of a ruckus this could cause in the markets. Be careful out there!