Daily Economic Commentary: United Kingdom

The pound made a stellar rally against greenback in last week’s trading as it rose all the way to 1.6400 after marking its 4-month low at 1.5708 last October 13. Aside from the cable, the other pound crosses also made a huge comeback with the GBPJPY reaching a high of 149.33 from a low of 141.19. That’s a little more than 800 pips! Wow.

The main factor that drove the pound higher was the suggestion that the BOE might not extend its asset-purchasing program. This was in contrast with BOE Governor Mervyn King’s view that the bank should still expand its facility. He is set to deliver a speech on October 20 (9:15 GMT) in Edinburgh where he’ll probably talk about the bank’s asset purchasing facility plan. As mentioned, he’s in favor of expanding the program. However, he doesn’t have enough support from the other MPC members for it to be approved. The BOE will have its MPC meeting minutes the following day at 8:30 GMT. Much debate will have to be taken whether the bank’s QE program will be stopped or further expanded. Volatility could ensue depending on the meeting’s consensus.

UK’s retail sales will be reported on October 22 at 8:30 GMT. Sales are expected to rise by 0.6% this month after it just stayed flat at 0.0% during the previous period. An increase in the figure could give the pound some extra lift.

Lastly, UK’s preliminary GDP for the third quarter will be released on October 23. UK’s economy is seen to have expanded by 0.1% after contracting by 0.6% in the previous quarter. According to the NIESR GDP estimate, which was published earlier this month, UK’s economy did not grow. So any growth in GDP could very well be bullish for the pound.

The GBP/USD finally managed to break 1.6400 yesterday as risk appetite popped its head once again in the forex market. Bulls weren’t able to sustain the rally though as the GBP/USD pair dropped back down and closed the US session at 1.6371.

For today, watch out for the public sector net borrowing at 8:30 am GMT and Bank of England Governor Mervyn King’s talk at 7:15 pm GMT. According to estimates, the public sector net borrowing edged lower to 15.2 billion in September from 16.1 billion in August. This means that more money was spent than the government than saved. Mervyn King, on the other hand, will talk about his take on the BoE’s quantitative easing program. Remember, King mentioned that he is leaning towards a further expansion of the program so be on your toes as traders might see this as a sign to sell the GBP!

Pound trading was up and down in yesterdays action. By the end of the day, the GBPUSD pair made no headway and closed at 1.6381, just a few pips from its opening price. Could this signal the end of the recent upswing by the GBPUSD?

A report showed yesterday that public sector net borrowing for the month of September was slightly better than expected, printing a figure of £14.8 billion. It was expected that the borrowing would come in at £15.3 billion. Nevertheless, this still brought the 6 month figure to £77.3 billion, the highest level of borrowing ever, while overall debt is now at £824.8 billion. It’s no wonder there are some concerns regarding their debt – this is equal to 59% of GDP! If this figure continues to rise in the future, we may see credit agencies downgrade the UK’s credit rating once again…

In his speech yesterday, Bank of England Governor Mervyn King said that is likely that the UK economy will post growth during the 2nd half of 2009. He said that lending conditions are improving as banks are finding it easier to access funding. King did not comment about possible expansion of the BOE’s quantitative easing programs.

Later today, the minutes of the last MPC meeting will be released at 8:30 am GMT. We could gain more insight as to whether King is still pushing for more stimulus. If it seems that he is winning over his fellow MPC members, could this lead to some pound selling?

The cable jumped by more than 200 pips as minutes from the latest BOE monetary policy meeting showed that the central bank officials were unanimous in maintaining their current level of quantitative easing. Pushing the cable much higher were words from BOE Governor Mervyn King implying that rates should be back to normal levels soon.

Although King didn’t specify how soon the central bank would raise rates, traders rejoiced at the idea that the BOE is no longer as pessimistic about the British economy like they were a few months back. Recall that King and another committee member voted to expand their quantitative easing amount by 25 billion GBP in their previous meeting. But now that all committee members agreed to sit and wait, many speculate that more rays of hope are on the British economy’s horizon. UK’s inflation report is coming up pretty soon and this should shed some light on whether the easing programs are actually doing the trick.

CBI industrial orders expectations were also released yesterday and the actual figure came short of the consensus. Analysts expected that the reading would inch up from -48 to -45 in October but the actual figure landed at -51. Still, the decline in the manufacturing sector has eased in the past three months. According to CBI, the components of the headline reading show that the manufacturing sector’s prospects look brighter as modest growth is expected in the coming months.

Today should be a pretty exciting day for the pound since UK’s economic calendar has retail sales data on tap. After holding steady in August, retail sales are projected to climb by 0.6% in September. If sales at the retail level do increase as expected, then the pound could make further headway.

Later on, monetary policy committee member Paul Tucker is scheduled to speak at the Barclays Annual Lecture in London. He could reiterate the central bank’s views regarding inflation and the current state of their monetary policy. Could this provide more fuel for the cable rally? We’ll find out soon enough!

After sliding during the euro session, the pound was able to finish strong and close positive against the dollar and the yen in yesterday’s price action. The cable sunk to as low as 1.6487 before closing at 1.6622. Similarly, the GBPJPY pair also slid to a low of 150.57 before closing at 151.73.

The UK’s monthly retail sales for September stayed flat at 0.0% as consumers spent fewer on food and clothing. Sales of food dropped by 0.1% during the month while sales of clothing and footwear also declined by 0.5%. Still, weak employment plus tight credit are deterring consumers from buying. Perhaps, these drops could signal the BOE to consider expanding their QE program to free some more liquidity. The pound lapsed following the report.

The pound, however, rallied back to finish strong as investors picked up their buying. Confidence was supported by the better-than-expected earnings of several Dow component firms in the US.

Much attention will be given to the UK today with the release of its third quarter GDP later at 8:30 am GMT. UK’s economy is expected to finally post a gain of 0.2% after contracting by 0.6% during the second quarter. GDP is a broad measure of economic growth. Hence, any expansion in the figure, especially after previously posting a loss, would reflect well in the economy and the pound at least in the short term.

The pound gave up all its gains for the week when the preliminary report on UK’s gross domestic product came out off-target last Friday. The GBP/USD was trading just a few pips around 1.6600 and eventually fell to the 1.6400 price region when the GDP report showed that UK’s economy contracted 0.4% instead of growing 0.2% like initially predicted.

What really pushed investors to let go of the pound was the wide-spread speculation that the disappointing GDP figures would prompt the BoE to expand its quantitative easing program. Remember that in August’s BoE meeting, Governor Mervyn King failed to push the expansion of the bank’s QE program to 200 billion pounds. With the GDP report showing a worse-than-expected figure, some experts said that the bank could revisit this proposal once again. However, note that the report is preliminary and could be revised up to show growth in the future.

The first important data to watch out this week is the Confederation of British Industry Realized Sales. The survey asks retailers and wholesalers whether they believe their sales volumes have increased or decreased for the reporting period. The estimate for October is a reading of 6. If forecast holds, it would be the second straight positive reading and could provide support for the falling pound. The actual figure will be released on Tuesday, 11:00 am GMT.

The Nationwide House Price Index is also due for release anytime this week. The consensus is that house prices increased again in October, this time by 0.7%. Last month, the increase was 0.9%.

The pound was able to get some nice hits in yesterday’s scuffle, but only ended the day slightly ahead against the dollar. Cable closed trading at 1.6337, after it had reached as high at 1.6396. Is pound selling back in style?

MPC member Adam Posen said yesterday that the Bank of England’s asset purchase programs should not spark inflation. He said that there has been no evidence that quantitative easing measures would lead to high inflation. Pretty interesting timing if you ask me – the BOE will be deciding next week whether they want to expand it’s £175 billion asset purchase program. Take note that in recent weeks, BOE Governor Mervyn King was losing support towards an expansion of the program. However, last week, a preliminary GDP report showed that the UK economy contracted by 0.4% in the past quarter, indicating that more stimulus may be needed. Could this possibly change the minds of other MPC members?

Later today, the CBI realized sales report will be released at 11:00 am GMT. Sales are expected to have risen, with the index projected to have a score of 6. However, given the recent GDP report, could we be in line for another surprise today? Watch out!

The cable started strong by racing from the 1.6300 area all the way to a high of 1.6440, at which it took a sharp U-turn. The stronger than expected CB realized sales report probably pushed the cable higher but the pair was unable to sustain its rally when weak reports from the US spurred risk aversion.

British retail sales grew at their fastest pace in almost two years, according to the Confederation of British Industry. Their realized sales index jumped from 3 to 8, beating the consensus at 6. Consumer demand had been boosted by more house purchases, which pumped up sales of home appliances and furniture. Components of the index also show that retailers have a more optimistic outlook for sales in the coming months.

The UK’s economic schedule is report-free today, leaving risk sentiment in the driver’s seat for the pound’s price action. Several economic reports are due from the US today and these include data on durable goods orders and new home sales. Both are expected to post improvements over their previous readings but if they don’t, we might see another round of risk aversion.

Surprisingly, the pound held its ground against the greenback despite the broad-based weakness in the global capitals markets. The cable even closed several pips higher at 1.6374 from an opening price of 1.6368. The GBPJPY, however, was the one that dipped to a low of 148.31 before closing at 148.58.

No economic reports were due in the UK yesterday. Skepticism, though, was felt across the board ahead of the release of US’s 3Q GDP reading today. The US economy is estimated to have grown by 3.2% during the last period after declining by 0.7%. The “safe-havens,” particularly the JPY, were favored over the other high yielding assets as investors were left unsure regarding the initial estimates.

Today (9:30 am GMT), UK’s net lending to individuals in September will be issued. The account is anticipated to have remained at £700 million. An increase in the figure indicates that spending has improved at least for the period covered. Such will reflect well in the economy and the currency. Then again, given the general bearish sentiment in the global markets, any increase in the pound could just be an opportunity for short sellers to jump back in.

The pound, after two days of ranging, finally managed to breakout and gain some ground against the dollar yesterday. Reports out of UK just faded into the background as the strong US GDP reading took center stage.

In any case, the forecast UK’s net lending to individuals in September released yesterday was right on target at £700 million. It is slightly lower than August’s revised up reading of £900 million.

The news event to watch out today is the release of the Nationwide HPI for October at 7:00 am GMT. The expectation is that prices grew 0.7%, which is slightly lower than the previous reporting period’s 0.9% increase. Looking at how risk sentiment is dominating price action, a better-than-expected figure could help push the pound higher against the dollar today.

The pound ended the week the same way it started it – on a sour note! The pair fell as dollar buying resumed in Friday’s trading session leaving the GBPUSD pair to close the week at 1.6460.

Late on Friday, the Nationwide housing price index came out with some mixed results. For the first time in a year and a half, housing prices were higher year on year. It marked the 6th consecutive month that the index rose. However, the pace at which prices were increasing has slowed down, as the report showed that prices rose by just 0.4% in the past month – much less than the expected 0.7% rise. Some analysts however, believe that prices may level out unless employment doesn’t pick up. If so, could this dampen sentiment upon the UK economy and thus push the pound lower?

Today, the manufacturing PMI report is due at 9:30 am GMT. It is expected that the index will print a score 50.1, after it had came up short of the 50.0 mark the past two months. Take note, the index is measured on a scale that uses 50.0 as the mark that separates contraction from expansion.

We could see some major moves in pound trading later this week, as the Bank of England’s monetary policy committee will be meeting this week to decide whether or not they should expand quantitative easing measures. Word on the street is that many business owners are pushing for an expansion of the program in order to help stimulate the economy. In the past, BOE Governor Mervyn King has called for an expansion of the bank’s asset purchase program - could this be the week he finally gets his wish?

So far, the bank has set aside £175 billion for this program. Some believe that there could be an expansion of up to £50 billion and that the BOE will keep its main interest rate at 0.50%. Be on the lookout when the MPC rate statement comes out this Thursday at 12:00 pm GMT.

Although the UK’s manufacturing PMI surged to a two-year high, the GBP ended lower against the USD. Strong US economic reports, which should’ve caused risk tolerance, were unable to keep the GBPUSD afloat. This means that traders are probably keeping a cautious stance ahead of the BOE’s monetary policy statement.

Boosted by a rise in output and new orders, UK’s manufacturing index soared from 49.9 to 53.7. Now that the index has landed well above the 50.0 mark, it indicates that the manufacturing sector is expanding. Components of the index also show that future production is expected to rise, creating an optimistic outlook for the manufacturing industry.

Still, the GBP was unable to benefit from this upbeat report as traders stay wary about a possible 50 billion GBP expansion of the BOE’s asset purchase program. Even though the actual announcement is set for Thursday, speculations of further quantitative easing could keep weighing the GBP down.

The only report due from the UK today is the construction PMI. The index, which is due 9:30 am GMT, is expected to climb from 46.7 to 47.2 in October. Meanwhile, the US economic schedule has only a few low-impact reports on tap, implying that risk aversion may continue to drag the GBPUSD lower.

The pound was able to net a modest gain contra the dollar and the yen after a mixed trading yesterday. The cable closed 1.6413 from an opening of 1.6396. The GBPJPY, on the other hand, also closed slightly higher at 148.29 after opening at 148.12

UK’s construction PMI slid farther away from the 50.0 hurdle to 46.2 in October from a score of 46.7 in September. The account, which gauges the activity in UK’s construction sector, was initially projected to come in at 47.2. A mark above 50 indicates expansion in the sector. Conversely, a tally below 50 suggests that the construction sector is still contracting. In any case, the drop in the index did not have much impact on the pound’s short term valuation as it just stayed relatively flat following the release.

Later in the day, the Halifax HPI was reported. According to Halifax, house prices in the UK rose for a fourth consecutive month in October by 1.2%. Though, October’s grade is still 4.7% lower compared to a year before. Nonetheless, the rise in the HPI tells us that more people are buying homes. This contributes greatly to overall consumption which should reflect well on the economy and the GBP.

The sterling, however, remained mixed after the report.

Today (9:30 am GMT), UK’s services PMI in October will be due. The index is seen to rise slightly to 55.4 from 55.3. Trading of the pound, however, could be light since the Fed is scheduled to issue their interest rate decision later in the day. While the Fed is widely expected to leave its rate untouched at 0.25%, it could already start talking about its exit strategies given the 3.5% growth in the US’s 3Q GDP. Such could be to the detriment of the “anti-dollars” like the GBP.

The pound made a convincing rally yesterday, as it climbed back above the 1.6500 price level against the dollar on account of better-than-expected data and increased risk appetite.

The [services PMI](http://www.babypips.com/forexpedia/Services_PMI_-_United_Kingdom) unexpectedly surged to 56.9 in October, which was an improvement from September’s reading of 55.3 and much higher than the 55.4 forecast. Since the PMI reading is higher than 50.0, it means that the services industry is expanding. This is the best reading since August 2007, providing more reason for the bulls to buy up the pound. The important question to ask now is whether these strong figures would eventually translate to growth or not in the future, especially since the previous GDP report turned out sour. 

After the FOMC’s performance yesterday, it’s the Bank of England’s turn to take center stage today as it is set announce their decision on UK’s interest rates and quantitative easing program at 12:00 pm GMT. An increase in rates is highly unlikely but currency traders are expecting the BoE to expand its QE program to £225 billion from £175 billion. If the BoE chooses not to expand its program, we could see more pound buying across the board… If you want to know more about the issue, head on [Forex Gump's blog](http://www.babypips.com/blogs/piponomics/boe_taking_one_step_back_or_fo.html). He did a short essay on this topic which I found very enlightening. 

Prior the decision, however, a report regarding the country’s manufacturing production for the month of September will be released. The prediction is that manufacturing production grew 1.1%, after falling 1.9% in August. Await the actual results at 9:30 am GMT.
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The pound survived yesterday as the BOE decided to expand quantitative easing by less than expected. The GBPUSD pair jumped to as high as 1.6637, before closing the day at 1.6583.

In a surprise move, the Bank of England expanded its asset purchase facility by just £25 billion, which only amounts to half of the £50 billion that was expected to be added. This brought the total amount of quantitative easing to £200 billion. It suggests that the BOE may believe that conditions do not warrant a larger injection of stimulus. Then again, maybe they are just being cautious and are leaving some room for more stimulus if things continue to worsen…

In other news, reports revealed that manufacturing and industrial production rose 1.7% and 1.6% during September. This was a nice surprise, as it was larger than the anticipated growth. Could this be the start of more growth to come in the fourth quarter?

Today, some inflation data will be released before tea time (9:30 am GMT), as the producer price index is due. The index is expected to show that prices at which manufacturers pay for their goods rose by 1.6% last October. Given all the choppy trading as of late, this report may not have much effect on pound trading but nevertheless, be on the lookout!

Lastly, with it being a Friday, watch out for any potential profit taking given the pounds gains the past couple of days.

The sterling sealed its place as one of the strongest performing currencies last week as it continued to amass gains despite the weak US employment report. Bullish sentiment for the sterling, which resulted from an upbeat BOE statement last Thursday, pushed the GBPUSD past the 1.6600 mark.

Also contributing to the rise of the sterling were strong PPI reports. The PPI input reading climbed to a 16-month high of 2.6% in October after posting a 0.2% decline in the previous month. PPI output came a bit below consensus as it posted a mere 0.2% uptick. Still, the increase in producer prices is expected to have a huge impact on inflation, which will be reported on Wednesday.

Aside from the BOE inflation report, claimant count change and and average earnings index are also due on Wednesday. Around 20,000 people are expected to have claimed their unemployment benefits in October, suggesting that UK’s labor market is still struggling to recover. However, the average earnings index, which is expected to rise by 1.5% in September, could be good news for the sterling. In addition, BOE Governor Mervyn King, who is set to deliver a speech by 10:30 am GMT on Wednesday, could give some hawkish comments about their economy.

UK’s economic schedule is free from reports today as it gears up for its first economic release this week: The trade balance data, which is due Tuesday 9:30 am GMT. Their trade deficit is expected to narrow from 6.2 billion GBP to 6.1 billion GBP in September. More sterling buying, perhaps?

The sterling pound continued its strong performance yesterday as it registered a new 4-month high against the dollar. The cable went as high as 1.6844 before closing at 1.6746.

The GBP was one of the beneficiaries of yesterday’s drop in the USD. The USD sold off when some members of the G-20 nations, including US Treasury Timothy Geither, said that stimulus programs that are still being implemented should not be lifted yet.

Earlier today, the BRC retail sales monitor for October was published. According to the report, UK retail stores had their best sales growth since 2002. Sales grew by an annualized 3.8% in October. Sales now are even seen to improve more with the Christmas season coming.

The RICS house price balance in October also shows that 34% of the surveyors reported increase in house prices. Rise in house prices suggests that demand for homes are picking up. This, of course, is positive for UK’s overall consumption.

In the mean time, UK’s trade balance in September will be released today at 9:30 am GMT. The country’s trade deficit is seen to shrink slightly to -£6.1 billion from -£6.2 billion. A smaller deficit could be bullish for the GBP since it means that less capital is leaving the country.

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The pound took an early hit yesterday when Fitch commented on the possibility of a downgrade in UK’s “AAA” sovereign rating. The GBP/USD was trading just a few pips below 1.6800 prior the comment and dropped to a low of 1.6602 before creeping up slowly to 1.6700 as the day went by.

According to the Fitch Group, a credit rating agency, the “AAA” rating could be lowered if UK’s government decides on another stimulus package. 

In other news, UK’s trade balance for September showed a £7.2 billion deficit, much higher than the £6.1 billion deficit expected. The increase was primarily caused by the 30% surge in the import of cars.

Expect to see a volatile pound today as a couple of hard-hitting data are on deck.

The first ones to watch out for are the Claimant Count Change, the Average Earnings Index and the Unemployment Rate at 9:30 am GMT. The Claimant Count Change records the monthly change of people who claim for unemployment benefits. The expectation is that another 20,200 people claimed unemployment benefits in October. Meanwhile, Average Earnings in September probably grew 1.5%. The country’s unemployment rate is predicted to have edged higher to 8.0% in September from 7.9% in August. 

  At 10:30 am GMT, BoE Governor Mervyn King is scheduled to do a press conference about the bank’s inflation report. The pound is likely to experience some wild price swings during this time as currency traders try to interpret what King is trying to say about future monetary policy.