Tag Archive | "Pound Sterling"

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Will UK Growth Sink GBPUSD?


Failing to overtake the 1.5700 technical barrier, the GBPUSD has fallen ahead of key economic events scheduled for the next five sessions.  Namely, market participants are targeting the preliminary gross domestic product figures earlier in the week.  This report is just one of about four that is expected, and may be cause for further pound sterling position squaring in the near term.

UK BBA Mortgage Approvals – July 24th 8:30 GMT

British Bankers Association reports are expected to show that mortgage approvals may have improved in the month of June.  Compared to May’s 30,200 approvals, June’s figures are forecasted to be a bit higher at 31,400.  Rosier than one would expect, the figures may be supported by a seemingly resilient labor market that showed an improvement in the country’s unemployment rate for the most recent three month period.  The rate improved to a 9-month low in the second quarter as reported last week.

UK Preliminary Gross Domestic Product – July 25th 8:30 GMT

The Office of National Statistics is anticipated to show that the UK economy gained slightly in the second quarter, improving to a quarterly contraction of 0.2%.  The figure, although still indicative of a shrinking economy, is an improvement over the 0.3% quarter over quarter slide seen in the last reading.  This isn’t that far from reality.  With the country already in the midst of the final stages of production for the 2012 Olympics, the country could have sustained a pickup in activity – buoying a temporary lift in the economic figure.  However, the positive gain is expected to have rather muted effects – with the annualized contractions still at a lackluster 0.3% decline.

CBI Industrial Orders Expectations – July 25th 6:00 GMT

Playing second fiddle to the session’s GDP report, the CBI industrial orders expectations report is likely to only add to any positive momentum built on the market moving report.  Forecasts are for the survey to show improvement in sentiment by the country’s surveyed manufacturers – rising to a reading of -10 versus last month’s actual reading of -11.  Any disappointment, through a lower than anticipated figure, could call the GDP results into question and jeopardize a sterling positive day.

Technical Outlook

Technically speaking, the GBPUSD currency major looks to remain under pressure heading into the highly anticipated GDP report.  Already failing to break through 1.5750 resistance, and confirming a noted rising wedge pattern, the current decline could extend to 1.5530 61.8% fib support.  A downside violation of the fib support would open scope for a 1.5500 test (medium term target).

Source: FXtrek IntelliChart™

Copyright 2001-2012 FXtrek.com, Inc.

 

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Construction Sector Slowdown Weighs On Pound Sterling


Pound sterling gains were halted in the overnight following the release of the Markit/CIPS UK construction PMI survey.  Although still relatively positive, survey results were worse than had been anticipated by analysts, leaving some still skeptical of any short term UK economic recovery.  As a result, the British pound traded slightly lower to yesterday’s high at 1.5841 against the US dollar.  The exchange rate hit as high as 1.5869 in midday trading yesterday.

According to the construction sector survey, index readings dipped to a 51.4 in January – below the December 53.2 mark.  Although this is the 13th consecutive month of gains, the figure stands as the weakest reading in 4 months and compounds fears that the recession isn’t just over yet.  Notably, however, today’s survey findings still portend to a thin silver lining for Europe’s second largest economy.  According to subcomponent readings, confidence among construction companies and business leaders continues to be optimistic – although the same companies are unlikely to add to current payrolls.

The recent round of optimism seems to have been spurred on by improving month to month comparisons in recent weeks.  Notably, manufacturing sector activity improved to an 8-month high, while confidence among consumers recovered to the highest in almost the same time period.

Given the overwhelming and rising optimistic sentiment, today’s results may be temporary as traders begin to shift their sentiment to a potential turnaround in the UK economy.  This should support the current sterling momentum – if at least for another session or two.

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Pound Falls, but may be Oversold


One of the pitfalls of forex blogging (or all financial reporting for that matter) is that it’s inherently after-the fact. In other words, any information about the past – while relevant – is inherently useless, since it has theoretically already been priced into the asset (or currency in this case). Before I begin my post on the Pound’s recent decline and the factors that wrought it, then, I wanted to offer the caveat that in analyzing past events, we must simultaneously look to the future.

Anyway, for anyone watching the Pound Sterling over the last month, its performance has been startling. It is down 7.5% for the year already (we’re only in March!), and has fallen 12% from its August peak of 1.70 USD/GBP. This represents an unbelievable about-face, as the Pound spent much of 2009 floating upwards following its lows from the credit crisis.

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What’s behind the decline? In short, economics and politics, or more precisely, the junction of economics and politics. As the British economy began its recovery from recession, analysts began to turn their attention to UK government finances. Another way of looking at this would be to say that analysts have shifted their gaze from the positive effect of government intervention (i.e. economic recovery) to the many lasting negative effects. Inflation and government solvency, of course, are the two most pernicious of the bunch.

The Bank of England’s quantitative easing program was comparable to the Fed’s program in relative terms, and in the aftermath of all of that money creation, inflation is slowly creeping up. The government’s free spending also contributed, and now, so is the sinking Pound, as prices for commodities and other imports are rising fast in local currency terms. Speaking of government spending, the UK government budget deficit is projected at 12% for 2010, slightly higher than 2009. You can see from the chart below that budget deficits are forecast to remain large for the next few years. Expectations are so low, in fact, that a reduction in the deficit to 3% of GDP by 2014-2015 would be viewed as a victory.

uk-budget-deficit-forecast-2009-2013
Naturally, the UK government feels some pressure to reduce its deficit, both for the sake of financial solvency and to control inflation. The problem is that an election must be called before June, and until then, there is natural pressure to continue operating the money printing presses 24/7 in order to appease the voting public. The same goes for the Bank of England; it can’t be expected to tighten monetary policy and/or reverse quantitative easing until after the election.

I’m not going to pretend that I understand British politics, but from what I’m hearing, it seems the problem is that the election polls are now very close. Previously, a major victory by the Conservative Party was seen as inevitable, and this was viewed positively by financial markets because of the expectation that they would rein in spending. Recently, the incumbent Labour Party has closed the gap, to the extent that a hung Parliament is now a likely outcome. This would be even less desirable than an outright Labour victory, because the sharing of power would make it unlikely that reforms of any kind would be enacted. With regard to forex, some have posited an inverse correlation between the rising popularity of Labour and the falling Pound.

With the crisis in Greece still unresolved, analysts are also making comparisons to the UK. Some have suggested that if Greece were to receive a bailout, then, investors would turn their attention to the UK, whose finances are in equally bad shape. Without the protection of the Euro, the Pound would be open to speculative attack. On the other hand, that the (declining) Pound is independent from the Euro could become in advantage, if it boosts exports.

Going forward, it’s difficult to make any predictions until after the elections and/or the government makes a firm commitment to reduce spending and lower its deficit. Some analysts think that regardless, the Pound is doomed to continue falling, perhaps all the way to the $1.40 mark. Others see the current decline as the “darkness before the dawn.” As I noted in the introduction to this post, the latter could certainly be right. Besides, most of the uncertainty has probably already priced in. While most of the factors currently weighing on the Pound are bearish, some contrarian investors might see this as a good opportunity to buy. And who’s to say they’re wrong?

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FX Market: U.S. Jobless Claims Report Falls, Bank of England Stalls


A busy morning in New York as U.S. employment indicators and announcements by both the ECB and BOE are setting the tone for the market.  It seems that U.S. dollar weakness continues to prevail, given the momentum from last night’s positive Australian employment report and further views that an economic recovery, in the global sense, is in the works.  As a result, buyers have pushed the Euro higher to trade $1.4765 against the U.S. dollar with the British pound breaking the $1.6000 figure to trade at $1.6052.

U.S. initial jobless claims surprised the masses as first time claimers of unemployment benefits fell last week to a level not seen since the beginning of the year.  For the week, applications dropped by an impressive 33,000 to 521,000 – significantly lower than the 540,000 that was predicted by analysts.  Today’s weekly Labor Department report conflicts with last week’s non-farm payrolls figure, giving some hope that there is now stabilization in the broader labor market.  Subsequently, the four week moving average has now dropped a haircut below 540,000, setting up for another interesting employment release next month.

jobless_100809

As expected both the European Central Bank and the Bank of England have kept their interest rates steady following announcements this morning.  However, key elements have now sparked some speculation to the downside, which may help the greenback gain some traction against both the Euro and pound sterling.

Keeping interest rates at a record low of 0.50%, the Bank of England is likely waiting till November to make any real decisions regarding monetary policy.  Although confidence has edged up slightly, along with some recovery in the housing sector, things haven’t really improved in the UK economy.  Manufacturing continues to place a lag on overall productivity as labor concerns continue to swirl – last print has unemployment in the country soaring to 7.8 percent annually.  The fragility of the economy has now placed even more emphasis on any possible extension of the Quantitative Easing plan.  Already at 175 billion pounds, there is still hope that the plan will be extended another 25 billion in order to pump even more funds into the market in order to prop up the economy.  Such a move will place significant pressure on the British currency as supply will overrun demand.  As a result, look for upcoming economic data to heavily influence the central bank November decision.

European Central Bank members additionally decided to keep to their key benchmark interest rate, citing that current level of interest rates remain “appropriate” for the time being.  This decision is likely to remain for an extended period given the fact that economic growth seems choppy at best for the region.  Production has improved slightly, contrary to overall labor markets which continue to remain weak.  Should policy makers increase lending rates to soon, risks remain abound that current nascent growth will be choked off.  As a result, the ECB will likely continue to work with lenders to free tight lending markets and hope that firm stabilization will come sooner than later.  Nonetheless, the underlying currency continues to be well supported against the U.S. dollar on worrisome economic fundamentals in the world’s largest economy.

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