Daily Economic Commentary: United Kingdom

Trading Discussion News and Economy
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The Cable received a lot of loving again yesterday as currency traders speculated that the Bank of England could hike rates earlier than expected. It opened the Asian trading session at 1.6168 and soared more than 100 pips within the day, finding itself at 1.6288 by the end of the US trading session.

In an interview with a UK newspaper, Andrew Sentance, a member of the Bank of England’s Monetary Policy Committee, surprised the market as it commented that the risk of inflation is higher this year which could push the bank to raise rates.

On the economic front, the November manufacturing production report showed that output remained flat instead of growing 0.3% like initially predicted. Yesterday’s report marked the second month of manufacturing production stagnation. On the other hand, the industrial manufacturing report for the same period showed an increase of 0.4%, slightly higher than the 0.3% consensus.

The NSIER GDP estimate reported that UK’s recession probably finally ended during the fourth quarter of 2009 by growing 0.3, providing the Cable with more buying support. UK’s actual GDP results will be released on January 26.

No important economic data coming out of UK today so expect the Cable price action to be driven by news from other nations, most notably the retail sales figures coming out of the US later.

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The pound trickled higher against the dollar yesterday, after trading within a tight range of just 70 pips. With the GBPUSD reaching one month highs, could this be a sign that the sterling’s recent run could be coming to an end?

It’s going to be another quiet day in the UK, as no economic reports are scheduled for release. Watch out for inflation news that will coming be out from both the euro zone and the US. My main man Forex Gump just wrote a write up about how important US inflation is – check it out here!

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Risk aversion forced the GBPUSD to hit the brakes on its recent rally. After climbing to a weekly high of 1.6355, the GBPUSD tumbled close to the 1.6200 handle last Friday. This week promises to be a volatile one for the pound pairs as the UK unloads a bunch of high-impact economic reports.

UK will release its inflation data on Tuesday 9:30 am GMT. Its annualized CPI reading is projected to hit 2.6% for December while its core CPI is expected to reach 2.3%. This would mean that yearly inflation is above the central bank’s 2.0% target, increasing the odds for a sooner rate hike. After all, BOE Governor Mervyn King previously announced that the central bank would commit to withdrawing their easing measures after inflation exceeds their target.

We’ll find out whether King would stick to his word when the minutes from the latest BOE monetary policy meeting are released on Wednesday 9:30 am GMT. The central bank may be taking a few steps closer to ending their asset purchase program after policymaker Andrew Sentence testified that the BOE should end their easing measures in order to keep inflation under control. But, with the UK still stuck in recession, some policymakers could vote to maintain or even expand their asset purchase program and I don’t think the pound would be too pleased with that.

Also due Wednesday is the claimant count change, which could print 3.3K in net hiring for December. Last November, the indicator printed a better than expected 6.3K increase in employment. Watch out for the December figure at 9:30 am GMT.

On Thursday, the UK will release data on public sector net borrowing and the CBI industrial orders expectations report. Net borrowing is estimated to drop from 20.3 billion GBP to 18.6 billion GBP in December. Now, we all know how the UK’s government deficit has been a burden on their local currency, but the pound could benefit if public sector net borrowing eases as expected. Meanwhile, CBI’s index of industrial orders could climb from -42 to -39 for January. This would imply that lower volumes of industrial orders are expected for the month.

Lastly, the retail sales report is due Friday 9:30 am GMT. After dipping by 0.3% in November, retail sales are expected to surge by 1.3% in December. If the actual figure doesn’t disappoint, the pound could carry on with its recent rallies.

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The pound erased its Friday losses against the dollar yesterday despite the lack of economic flows in the UK and the US. The Cable went to as high as 1.6379 before closing at 1.6338.

Today at 9:30 am GMT, UK’s annualized CPI in December will be reported. UK’s headline inflation figure is projected to reach 2.6% from 1.9% while the core version of the account is also seen to jump to 2.3% from 1.9%. Such significant leap could push the pound higher against the dollar and the yen. Note also that the BOE’s inflation target is pegged at only at 2% so if the consensus holds true, the bank could hold back some of its current stimulus measures to prevent prices from moving higher.

Later at 7:30 pm GMT, BOE Governor Mervyn King will deliver a speech at the University Business Leaders Forum, in Exeter. Traders and investors will look into his speech for more clues regarding the central bank’s future monetary policies. Any hawkish statement, especially if the country’s CPI comes out strong, could further buoy the pound.

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The Cable managed to stage an early rally during the Asian trading session yesterday. The Cable’s move, however, proved to be short-lived as the pair erased all of its gains when another wave of risk aversion hit the markets during the European trading session.

UK’s annualized CPI for December came out surprisingly better-than-expected yesterday. Instead of printing an increase of 2.6%, the CPI showed that prices rose by 2.9%. The core version of the report, which excludes the prices of volatile items such as food and energy, showed a rise of 2.8%, higher than the 2.3% forecast. Still, even if the CPI is now over the BOE’s 2% inflation target, the prospect of a rate anytime soon is close to nil. The economic fundamentals of the UK remain sour and unless some convincing positive data comes out, rates would probably remain as is.

The BOE seems to agree. Governor Mervyn King of the BOE said in a statement later that day that inflation would probably return below two percent as the bank still isn’t ready to unwind stimulus measures. He added that UK’s money supply is “undesirably low” and the uptick in inflation is just a fluke.

At 9:30 am GMT, expect to see the Claimant Count Change, the MPC meeting minutes and the employment situation report.

The Claimant Count Change is UK’s version of the unemployment claims. It measures the monthly net change in the number of people who claimed jobless unemployment benefits. The forecast a change of 3,300, which means that less people claimed for unemployment benefits in December. If the actual figure later comes out lower-than-expected, the Cable could garner some buyer support.

Meanwhile, the MPC meeting minutes outlines the results of the BOE’s interest rate meeting a few weeks back. Traders pay attention to the report because it gives them a way to forecast possible changes of the bank with regards to monetary policy.

Lastly, the employment situation report is predicted to show that unemployment edged up to 8.0% in November from 7.9% the month before. As for employee wages, a 1.6% increase is expected for the same period.

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The pound took some losses against the USD, but did relatively better compared to other majors as it found some support from good economic data. The GBPUSD fell by 100 pips to close at 1.6285, not so bad considering how volatile the pair normally is.

The UK labor market got a piece of good news when the Claimant Count Change showed that unemployment claims fell by 15,200, its best showing since April 2007! This was much better than forecast, which had projections of claims falling by just 3,300. Meanwhile, the unemployment rate unexpectedly fell to 7.8%, after experts had predicted it would rise to 8.0%. But before you sip your cup of tea, let me warn you, one reason for the downtick was that companies froze pay and cut back on working hours so as to keep maintain labor and not fire anyone. Given the bleak outlook of the UK economy, it may actually be awhile before British companies start hiring once again.

In other news, the minutes of the latest MPC meeting revealed that the MPC has decided to go ahead and spend the rest of the ₤200 billion asset purchase program. This indicates that BOE officials are still pessimistic over the UK economy and they feel that the economy needs as much stimulus as it can get.

Today at 9:30 am GMT, the Public Sector Net Borrowing report will be published. This report measures the difference between the spending and income by government run institutions. It is expected to post a deficit of ₤18.6 billion. Take note that one of the UK government’s main problems right now is debt. If they continue to post deficit numbers in their spending, it may lead to some more concerns regarding the UK’s debt outlook.

Later on at 11:00 am GMT, the CBI Industrial Orders Expectations index is due. The index is expected to post a reading of -39, an improvement from previous months’ scores. Still, it would be below the 0, which is the figure that separates expectations for improving or worsening orders. If this comes in worse than expected, we may see another round of pound selling.

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As the UK budget deficit hit a record high, the pound got hammered by both the greenback and the Yen during yesterday’s trading match. The cable broke through a key support level and fell to a low of 1.6125 while the guppy tumbled to 145.45.

The public sector net borrowing report highlighted the UK’s worsening fiscal situation as it printed an increase of 15.7 billion GBP in borrowing for December. Although the monthly increase was less than expected, it brought the UK’s yearly total debt to 142.6 billion GBP - the highest on record since 1946! In fact, UK’s net debt reached almost 870 billion GBP, which comprises 61.7% of the country’s annual GDP. Yikes! The UK government better do something to remedy their fiscal situation soon…

CBI industrial order expectations, which was also released yesterday, failed to provide support for the pound even if the actual figure hit the mark. The reading for January came in exactly as expected as it climbed from -42 to -39, indicating that order volume is still expected to decline but at a slower pace.

The pound could recover some of its losses today if the UK retail sales report meets or beats the consensus. Retail sales are expected to rise by 1.3% in December, which would be a strong rebound over the 0.3% decline seen last November.

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For the third straight time, the pound sunk versus the dollar and yen in last Friday’s trading. The cable (GBPUSD) fell to a low of 1.6078 before closing at 1.6114. The guppy (GBPJPY) likewise slid down and settled at 144.82 from an opening of 146.43.

The UK’s December retail sales fell short of the 1.3% forecast with only a 0.3% gain. UK’s rising inflation, which is currently pegged at 2.9%, appears to have squeezed consumers’ spending even in the height of the Christmas season. The less-than-stellar rise in retail sales could also be reflected in the UK’s upcoming 4Q growth reading.

The pound slid sharply following the report.

This week will kick off with the release of the UK’s fourth quarter GDP score on January 26. The UK’s economy is expected to have finally escaped recession with a 0.4% gain after contracting by 0.2% during the previous period. Though as mentioned, the poor retail sales figure could dent this GDP projection. Of course, the pound could take another hit if the UK’s 4Q GDP growth comes in less than the estimate.

The UK’s CBI distributive trades data will be issued on January 27. The index tallies about 160 surveys of retail and wholesale firms regarding the relative level of their sales volume. While a reading above 0 indicates a higher level of sales volume, the index for the month of January is expected to cool down to 12 from 13.

On January 29, the UK’s nationwide HPI in January will be due. House prices are seen to rise again by 0.4% after gaining by the same rate in December. Though this increase in prices could only be a result of the UK’s higher inflation figure rather than an increase in housing demand. Still, a jump in the HPI could give the pound some short term boost.

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“Not me!” said the pound yesterday. Despite the clean economic calendar and the consolidation of other major currencies, the pound was able to post some nice gains over the dollar and yen in yesterday’s trading session.

From its intraday low of 1.6091 during the Asian session, the Cable (GBPUSD) soared 150 pips and found itself at 1.6240 by the end of the US trading session. Likewise, the Guppy (GBPJPY) staged a magnificent rally, climbing to 146.54 from its week open price of 145.40.

The UK’s preliminary GDP report to be released today at 9:30 am GMT, which is predicted to show a positive figure, is the likely suspect of yesterday’s rally. Take note that the UK’s economy is the only one amongst the G7 nation stuck in the recession pool. The report is expected to show that UK’s economy finally expanded by 0.4% during the final quarter of 2009. If the actual figure comes in lower, the pound could be in for a world of hurt when currency traders unwind some of their pound longs from yesterday…

The BBA mortgage approvals will also be released at the same time. The consensus is that BBA mortgage approvals rose to 46K in December, up from the 44.7K approvals seen the month before. A rising level of mortgage approvals is usually pound positive as it is taken as a sign that more and more people are becoming financially capable.

Lastly on the economic calendar is BOE Governor Mervyn King’s testimony at 9:45 am GMT. This could be a big thing for the foreign exchange markets as he’ll be talking about the country’s financial sector and banking institutions.

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Oh boy, it looks like the Queen might lose some sleep for a couple of days after what happened yesterday! The pound dropped as it was hit by a run of risk aversion as well as some disappointing economic news. The GBPUSD pair dropped 96 pips to close at 1.6144.

The disappointing news that I’m talking about is the release of the GDP report. Yes, yes, the UK is finally out of recession… but with the report printing just 0.1% growth last quarter, as opposed to the expected 0.4% increase, it raised speculation that the recovery would be more uneven that initially expected. Since the start of the recession (which lasted six quarters!), the country’s economy has contracted by a whopping 6% and has been plagued by a weak labor market. With Bank of England official meeting next week to decide what to do next, this could give them reason to take a double look on withdrawing quantitative easing measures.

BOE Governor Mervyn King also talked about the financial and banking sector. He said that the banker sector needed to be “safer”. Looks like he’s following US President’s Obama’s lead in wanting to reform the banking system. Lets see how this develops – if this leads to actual proposals, could this cause investors to run away from British markets?

Also released amidst all the chaos of the GDP aftermath was the BBA mortgage approvals report. The report basically came in line with expectations, as 45,900 mortgages were approved in December. This was a slight uptick from November’s revised figure of 45,000.

Today, we could be in for some more wild rides as the CBI Realized Sales index is due at 11:00 pm. The index is expected to have a reading of 11, which would mean that sentiment has worsened since last December.

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Despite the weak CBI realized sales report, the pound managed to stay resilient against the greenback and even strengthened against the yen. Hawkish comments from BOE official Andrew Sentance helped the pound stay afloat.

According to Sentance, the pound’s weakness would continue to push price levels higher, pumping up inflation. He said that they can’t keep lowering prices in order to keep inflation in check, implying that the central bank should raise rates instead. Although the recently reported GDP figure was weaker than expected, Sentance reiterated his optimistic outlook for the British economy. For him, a recovery in the labor market and in the housing market would be key factors to growth.

Meanwhile, CBI realized sales fell sharply in January, suggesting that consumers kept their money in their pockets right after splurging during the December holidays. The index plummeted from 13 to -8, marking its largest drop since August 2009. This puts a downside risk on the upcoming retail sales report for January.

No economic reports are due from the UK today so keep an eye out for US economic releases that could significantly affect risk sentiment. The US will be releasing their durable goods orders and weekly unemployment claims today 1:30 pm GMT.

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The pound bears eventually got the ‘W’ over the bulls after a grueling tug-of-war kind of match in yesterday’s session. The GBPUSD fell and closed at 1.6129 after reaching a high of 1.6276. The GBPJPY showed a similar movement as it slid and settled at 144.96 from a high of 147.23.

No economic reports were due in the UK yesterday. The lack of economic flows in the UK plus the Fed’s recent outlook upgrade while maintaining their current accommodative policies allowed the pound to rally strong up until the start of the US trading session. The pound bears then took over and erased the earlier gains as a bunch of US economic data disappointed the markets.

On deck today at 6:00 am GMT is the UK’s Nationwide HPI in January. House prices are expected to register a 0.4% month-over-month gain in January after gaining by the same rate during the previous month. Any deviation from the estimate could of course impact the short term valuation of the pound in either direction.

The market will, however, focus its attention on the 4Q GDP report of the US later. A growth of 4.5% or better could spark a rebound in equities and higher yielding currencies such as the GBP. Though, it could also go the other way. A better-than-expected result could likewise set off some speculations that the Fed could raise their interest rate sooner than later, negatively affecting the anti-dollars like the pound.

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After days of holding strong, the pound bulls finally gave in and let the bears drown the Cable below strong support at 1.6100 last Friday.

The upside surprise on Nationwide house price index last Friday was able to provide a slight boost the Cable although the move proved to be short-lived as dollar-buying momentum was too strong. The report showed that house prices jumping 1.4%, more than three times consensus. Experts are saying that the underlying trend is definitely up and as long as interest rates remain low, we can expect the increase in house prices to hit double-digits very soon.

With the amount of high-profile economic data coming out this week, it looks like the Cable’s going to get a lot of loving!

Later today at 9:30 am GMT, watch out for UK’s manufacturing PMI. The survey is designed to see whether the manufacturing industry is growing or not. A reading above base line 50 indicates expansion. The expectation for January is a reading of 54.1, which is the same reading seen last December.

On February 3, at 9:30 am GMT, UK’s services PMI is due. It is expected to show that expansion in the services industry eased a bit. A reading of 56.6 is expected for January, slightly lower from the 56.8 reading seen the month before

On February 4, the Monetary Policy Committee of the Bank of England will announce their decision on UK’s benchmark interest rates. The MPC is widely expected to maintain rates at 0.50% and hold off on any changes in their quantitative easing program. However, some rumors are going around that we could see a split vote in this week’s decision since UK finally managed to crawl out of recession. Any hint the bank would unwind its stimulus programs earlier-than-expected could send the Cable flying…

On February 5, the January producer price index for input will be released. The PPI input measures the monthly percentage change of goods and raw materials bought by manufacturers. The forecast is that prices rose 0.9%. Rising PPI usually translates to higher inflation because businesses tend to pass on increased costs to their customers.

The Halifax house price index is also tentatively set for release this week. Similar to Nationwide’s version, the Halifax HPI is expected to show that house prices grew 0.9% in January. If forecast holds, it would mark the seventh month in a row of increase, which would give more reason for investors to believe that UK’s housing market improving.

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Sweet marmalade! After trading as low as 1.5851, the GBPUSD pair shot back up to close the day at 1.5961 as risk appetite was strong in yesterdays trading session. Could this be a sign that the cable is on the comeback trail after last week’s losses?

The UK got a piece of good news yesterday, when the manufacturing PMI report printed a reading of 56.7, which was a nice improvement over last month’s reading of 54.1. Just in case you haven’t been keeping track, this marks the index’s highest level in 15 years! Looking deeper, it seems that export demand has also picked up. Could this be a result of the pound’s poor performance as of late?

Today, the construction PMI will be released at 9:30 am GMT. The index is expected to print a score of 47.7, which would be below the 50 base line number. This would mean that the construction industry is still lagging behind in terms of recovery, but sentiment is slowing rising.

Tomorrow, the services PMI is due at 9:30 am GMT as well. Initial estimates are for a small decline in the index from 56.8 to 56.6. Still, this would be above 50.0, indicating that the services industry is slowly growing.

Watch out for the Halifax HPI report, which is due any day this week. The report is expected to show that housing prices rose by 0.9% in January. Lastly, watch out for any comments made by BOE officials ahead of the rate statement due later this week. Given how poorly the UK economy did the last quarter, they may drop hints that they will keep quantitative easing measures at current levels.

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Taking one teeny tiny step at a time, the pound managed to overtake the greenback during yesterday’s trading. The improvement in UK’s construction PMI pushed the cable closer to the 1.6000 handle and allowed the guppy to keep its head above the 144.00 mark.

Although the January construction PMI indicated that the industry is still contracting, the index managed to climb from 47.1 to 48.6 during the month. This implies that the contraction is taking place at a much slower pace this time. Components of the index also show that construction firms are shedding jobs at their slowest pace in more than a year.

It’s the services industry’s turn to release their January PMI today 9:30 am GMT. Unlike the construction industry, the services sector has been strongly expanding for the past six months. However, the reading for January is expected to dip lower from 56.8 to 56.6. So far, we’ve seen better than expected PMI figures from the manufacturing and construction sectors. If the services PMI also comes in stronger than consensus, it could set a hawkish tone for the BOE rate statement tomorrow.

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After a strong start, the Cable ran out of gas and got left behind in yesterday’s currency race. The GBPUSD fell all the way to 1.5898 after reaching a high of 1.6069.

The pound started to make its downturn when UK’s services PMI declined to 54.5 in January from 56.8. The consensus was 56.6. Some said that the worst snowfall that hit the country in 50 years negatively affected the activity in its service sector. Well, the UK is not getting a break as of late. As you noticed, even mother nature appears to be slowing the economy down. Tough luck.

Today at 9:00 am GMT, UK’s Halifax HPI for the month of January will be released. The index is estimated to have expanded again by 0.9% on top of last month’s 1.0% gain.

The big even, however, will be the BOE’s interest rate decision later. The bank is widely expected to leave its interest rate at 0.50%. The bank’s asset purchase facility is likewise seen to be left unchanged at £200 billion. My esteemed colleague, Forex Gump, wrote an interesting article regarding the UK’s present economic condition and outlook. Kindly check it here.

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The Cable took a major hit in yesterday’s trading session when risk aversion came crashing down on the markets. From it’s Asian open price of 1.5896, the Cable tumbled down to a low of 1.5729 before finally closing the US session at 1.5752.

It also didn’t help that the Bank of England did not deny the possibility of an expansion of its quantitative easing program in its rate statement yesterday. It seems that the bank, while keeping interest rates steady at 0.50%, is taking a cautious approach during this time of recovery, ready to rev up anytime and provide additional stimulus if the economic recovery is too weak.

In other news, the Halifax house price index failed to meet the 0.9% expectation, printing only a 0.6% increase. The pace of increase was also slightly lower than December’s revised down figure 0.8% (from 1.0%).

For today, watch out for the January’s producer price index input at 9:30 am GMT. The PPI input measures the monthly average percentage increase or decrease in price of goods and materials manufacturers buy from their suppliers. The PPI is commonly used as leading indicator of inflation because businesses tend to pass on additional costs they incur to their customers. The forecast is an increase of 0.7% in prices, up from the previous month’s 0.1% rise.

I’d also like to point out that the US non-farm payrolls is due for release today so we probably won’t see volatility pick up until then. Just like the previous releases, currency traders and investors could just sit on the sidelines and wait for the results of the report first before putting any big positions on the table.

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Tough week for the pound as it got crushed by wave upon wave of dollar buying. Cable dropped by 300 pips to finish last week at 1.5630, marking the third straight week that the GBPUSD pair has closed lower.

The pound fell despite some relatively good data from the UK, as the producer price index showed that manufacturing input prices rose by 2.0% in January. This was better than the expected 0.7% increase and brought the annualized increase to 8.3%. This index measures the change in prices of what manufacturers pay for their goods and services. It is an indicator of inflation because manufacturers normally pass the buck on to the consumers to handle price increases.

Remember, the UK has been plagued by deflation concerns so any news of rising inflation is considered good for the economy. Still, with all their problems, we probably shouldn’t expect them to raise interest any time soon.

Tomorrow, the BRC Retail Sales Monitor and RICS Housing Price Balance reports will be released at 12:01 am GMT. The BRC report measures the change in retail sales from BRC retailers. No initial forecasts have been released. Last December, sales rose by 4.2% - if sales jumped in January, it may provide support for the slumping sterling.

The RICS index is expected to show a score of 29%, meaning that more surveyors are reporting that housing prices are rising. Looking at past data, housing prices have been rising the past few months, although at a slower pace.

The big data for this week will be coming out on Wednesday as manufacturing production and GDP figures are due. All eyes, however, will most likely be on the BOE Inflation Report. What will the BOE have to say about inflation now? We shall have to wait and see!

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The pound’s GPS navigation system was probably out of wack yesterday, causing pound pairs to drive around aimlessly all day. Aside from that, the lack of economic catalysts on deck led to a relatively quiet day in the currency markets.

Today, the freshly released BRC retail sales monitor reported a 0.7% year-over-year decline in sales for January. This is a far cry from the 4.2% surge in retail sales reported last December which, in hindsight, was most likely a result of holiday shopping. Still, the decline in January hints that the government’s version of the retail sales report, which isn’t due until next week, could post a similar drop.

Also fresh off the economic oven is the RICS house price balance, which showed that 32% of surveyors reported price increases in their area. This actual figure for January surpassed the consensus of 28% and the previous figure of 30%. This may seem like good news but isn’t Britain also worried about a housing price bubble? Yikes!

Up ahead, we have the trade balance due. This could show that the deficit narrowed from 6.8 billion GBP to 6.6 billion GBP in December. Watch out for the actual release at 9:30 am GMT today.

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The pound finally got a breather yesterday as it was able to close positively against the dollar and yen after declining for several days. The cable (GBPUSD) closed at 1.5705 from 1.5600. The guppy (GBPJPY), similarly, settled at 140.74 from 139.30.

The UK’s negative trade balance unexpectedly expanded to -£7.3 billion in December from -£6.8 billion, which is its highest level in 11 months, due to a rise in imports from the non-EU nations. The pound lost some ground following the worse-than-expected result.

Still, the pound was able to rise to its feet and finish strong over the greenback because of the rebound in the US capitals markets. The broader S&P 500 yesterday finished with a 1.30% gain.

Today will be a little hectic in the UK with the release of a couple of top tier reports. First up is the UK’s industrial and manufacturing production in December which will be reported at 9:30 am GMT. Both accounts are seen to have risen again by 0.4% and 0.2% respectively during the month of December.

The UK’s inflation report will also be issued later at 10:30 am GMT. The upcoming report may downgrade UK’s growth forecast in 2010 given the still sluggish performance of the economy. Meanwhile, inflation is projected to spike during the first half of the year. The rise in prices is seen to have exceeded 3% in January. So if prices do soar, the BOE may have to start thinking about tightening its belt before everything gets out of hand.