Consumer confidence in the U.K. is expected to improve for the third consecutive month in June, with economists forecasting the Nationwide index to increase to 55 from 53 in May, and the data is likely to encourage an improved outlook for the region as policymakers expect an economic recovery later this year.
[U][B]Trading the News: U.K. Nationwide Consumer Confidence[/B][/U]
[U][B]What’s Expected[/B][/U]
Time of release: [B]07/07/2009 23:01 GMT, 19:01 EST[/B]
Primary Pair Impact : [B]GBPUSD[/B]
Expected: 55
Previous: 53
[B][U]Effects the U.K. Nationwide Consumer Confidence had over GBPUSD for the past 2 months[/U][/B]
[B]Period[/B]
[B]Data Released[/B]
[B]Estimate[/B]
[B]Actual[/B]
[B]Pips Change[/B]
[B](1 Hour post event )[/B]
[B]Pips Change[/B]
[B](End of Day post event)[/B]
May 2009
06/02/2009 23:01 GMT
52
[B]53[/B]
-6
-253
Apr 2009
05/05/2009 23:01 GMT
43
[B]50[/B]
-34
+58
[U]
May 2009 U.K. Nationwide Consumer Confidence[/U]
Consumer confidence in the U.K. rose for the second-consecutive move in May, with the Nationwide index advancing to 53 from a revised reading of 51 in April, and households may continue to hold an improved outlook going forward as the Chancellor of the Exchequer Alistair Darling expects an economic recovery later this year. Meanwhile, the Bank of England voted unanimously to expand its asset purchase program by another GBP 50B in an effort to foster a speedy recovery however, as Governor Mervyn King anticipates a ‘slow and protracted recovery,’ the central bank may continue to take unprecedented steps to shore up the economy as growth and inflation falter. As a result, the MPC is widely expected to hold borrowing costs at the record-low throughout the year in order to jump-start the ailing economy, and the board is likely to hold a dovish outlook going forward as growth prospects remain subdued.
[U]April 2009 U.K. Nationwide Consumer Confidence[/U]
The Nationwide confidence index surged to 50 in April from a revised reading of 42 in the previous month to mark the biggest advance in nearly two-years, with the gauge for future expectations rising to 70 from 57 in March. The data suggests households are turning less pessimistic towards the economy as policymakers take unprecedented steps to stem the downside risks for growth and inflation however, the economic outlook for the U.K. remains bleak as the nation faces its worst recession since the Great Depression. At the same time, the National Institute of Economic and Social Research forecasts GDP to contract 4.3% this year, which would be the biggest decline since 1931, and anticipates economic activity to recover towards the end of the year as households face fading demands for employment paired with the downturn in the housing market. As a result, the Bank of England may take additional steps to shore up the economy as they maintain a dovish policy stance going forward.
[B]What To Look For Before The Release[/B]
Traders with access to market depth information via the FXCM Active Trader Platform may use it to gauge the potency of the economic data release as well as to shed some light on the market’s directional bias. Increasing volume ahead of the announcement will telegraph likely follow-through behind whatever move is to materialize, while an imbalance in available liquidity on the Bid versus the Offer side of the market will tell us the direction major institutions are likely favoring ahead of the announcement:
[U][B]Bullish Scenario:[/B][/U]
If we see substantially deeper available liquidity on the Bid side of the market, this tells us that major price providers in the market are looking to buy the GBP against the US Dollar. Considering that close to 60% of all FX market volume is cleared through just six top banks, we see it prudent to be on the same side of the trade as major institutions and will favor a bullish bias on GBPUSD ahead of the data release.
[U][B]Bearish Scenario:[/B][/U]
If we see substantially deeper available liquidity on the Offer side of the market, this tells us that major price providers in the market are looking to sell the GBP against the US Dollar. Considering that close to 60% of all FX market volume is cleared through just six top banks, we see it prudent to be on the same side of the trade as major institutions and will favor a bearish bias on GBPUSD ahead of the data release.
[B]
How To Trade This Event Risk [/B]
Consumer confidence in the U.K. is expected to improve for the third consecutive month in June, with economists forecasting the Nationwide index to increase to 55 from 53 in May, and the data is likely to encourage an improved outlook for the region as policymakers expect an economic recovery later this year. However, the final 1Q GDP reading reinforced a weakening outlook for Europe’s second largest economy as the growth rate plunged at an annual rate of 4.9% to mark the biggest decline since 1958, and economic activity is likely to remain subdued throughout the year as Bank of England Governor Mervyn King anticipates the recovery to be ‘a long, hard slog.’ At the same time, business investments fell for the second consecutive quarter during the three-months through March, while retail spending unexpectedly dropped in May for the first time in three-months, and conditions may get worst throughout the second-half of the year as firms continue to scale back on production and employment in order to weather the downturn in global trade. Furthermore, a report by the central bank showed home equity withdrawals fell at its fastest pace on record during the first quarter as households continued to face tightening credit conditions, while mortgage applications increased to 43.4K in May to mark the smallest rise since recordkeeping began in 1993, and the outlook for private-spending remains bleak as consumers face a weakening labor market paired with fears of a protracted recession. As a result, the BoE is widely expected to hold the benchmark interest rate at the record-low later this week, with all of the 49 economists polled by Bloomberg News forecasting the central bank to keep the key rate unchanged at 0.50%, and market participants speculate that the MPC will expand its asset purchase program and utilize the remaining GBP 25B allotted by the Chancellor of the Exchequer this month in an effort to jump-start the ailing economy. However, Credit Suisse overnight index swaps show investors anticipate the board to tighten policy over the next 12 months as they maintain a 2% target for inflation, and long-term expectations for higher interest rates in the U.K. may lead the British pound higher over the near-term as the central bank puts a floor on borrowing costs.
Trading the given event risk favors bullish forecast for Cable as market participants anticipate consumer sentiment to improve for the third month in June, and price action following the event could set the stage for a long British pound trade. Therefore, if the Nationwide index advances to 55 or higher, we will look for a green, five-minute candle subsequent to the release to confirm a buy entry on two-lots of GBP/USD. Once these conditions are met, we will place our initial stop at the nearby swing low (or reasonable distance), and this risk will establish our first target. Our second target will be based on discretion, and we will move the stop on the second lot to breakeven once the first trade reaches its target in order to preserve our profits.
In contrast, as households face a weakening labor market paired with fears of a protracted downturn, consumer sentiment may deteriorate throughout the second-half of the year as growth and inflation falter. As a result, a drop to 50 or lower in June would favor a bearish outlook for the Sterling, and we will follow the same strategy for a short pound-dollar trade as the long position mentioned above, just in reverse.
