UK Financial Market Review August/September 2012 serve announced after its monthly monetary policy meeting that no new stimulus would be added to the market. The GBPUSD closed August 1 at 1.5533 after opening up at 1.5674, a disappointing beginning to the month. The ECB Dilemma Central bank chatter continued to be the driving factor behind the British Pound’s price action on the second day of the month, as the European Central Bank disappointed market participants by failing to announce major measures to support Italian and Spanish bond markets. Expectations were high ahead of the meeting, which sent the GBPUSD back to 1.5677, but upon the disappointment, the GBPUSD came crashing back down, finishing the day at 1.5511. Perhaps in what would be a testament to how fickle finan- cial markets were in the month of August, by Friday, senti- ment was completely reversed on the ECB decision, with many believing that the ECB was indeed still working on a bond-buying program. This sentiment alone helped set the tone for the British Pound for the month of August, sending the GBPUSD back up to 1.5641. With the ECB on board for a bond-buying program, or at least with that being the prevailing sentiment in the market, the British Pound was set to see relief given its proximity and relationship to the Euro-zone crisis; Britain’s export- ers and financial sector have exceptionally strong ties to continental Europe. With the Euro-zone crisis on the sidelines for the time be- ing – as it would be for the rest of the month – the path Around the globe, August was a rather boring month: equity market volumes dropped by 30-60% in some cases as investors abandoned their trade screens in favor of vacations. This is not unusual; August typically is characterized by lower market participation rates. Despite these conditions, August was still a very exciting month for the British Pound. As has been the case for the past several months, many of the key drivers influencing the British Pound were rooted in the European debt crisis. On August 1, Jens Weidmann, President of Germany’s central bank, the Bundesbank, said candidly that the European Central Bank shouldn’t overstep its boundaries, a direct reference to the idea that the ECB could embark on a massive bond-buying program to keep Italian and Spanish bond yields capped below predetermined levels (which were never specified). These measures would be sure to relieve stress in the Euro-zone, which would be considered bullish for the British Pound; but in their absence, the Sterling declined across the board, with the GBPUSD falling by approximately 100-pips. The British Pound’s losses on August 1 were compounded by two other major events. Early in the day, Germany’s ruling cabinet issued a statement railing against giving the Euro-zone’s bailout fund, the European Stability Mechanism (ESM), a bank - ing license. Furthering the flight to safety for the day, which has proven to be a negative occurrence for the British Pound, the Federal Re- August 2012 Recap ECNForex.co.uk, 2012 - All rights reserved
Transcript
UK Financial Market ReviewAugust/September 2012
serve announced after its monthly monetary policy meeting
that no new stimulus would be added to the market.
The GBPUSD closed August 1 at 1.5533 after opening up at
1.5674, a disappointing beginning to the month.
The ECB Dilemma
Central bank chatter continued to be the driving factor
behind the British Pound’s price action on the second day
of the month, as the European Central Bank disappointed
market participants by failing to announce major measures
to support Italian and Spanish bond markets. Expectations
were high ahead of the meeting, which sent the GBPUSD
back to 1.5677, but upon the disappointment, the GBPUSD
came crashing back down, finishing the day at 1.5511.
Perhaps in what would be a testament to how fickle finan-
cial markets were in the month of August, by Friday, senti-
ment was completely reversed on the ECB decision, with
many believing that the ECB was indeed still working on a
bond-buying program. This sentiment alone helped set the
tone for the British Pound for the month of August, sending
the GBPUSD back up to 1.5641.
With the ECB on board for a bond-buying program, or at
least with that being the prevailing sentiment in the market,
the British Pound was set to see relief given its proximity
and relationship to the Euro-zone crisis; Britain’s export-
ers and financial sector have exceptionally strong ties to
continental Europe.
With the Euro-zone crisis on the sidelines for the time be-
ing – as it would be for the rest of the month – the path
Around the globe, August was a rather boring month: equity market volumes dropped by 30-60% in some cases as investors abandoned their trade screens in favor of vacations. This is not unusual; August typically is characterized by lower market participation rates.
Despite these conditions, August was still a very exciting month for the British Pound.
As has been the case for the past several months, many of the
key drivers influencing the British Pound were rooted in the
European debt crisis. On August 1, Jens Weidmann, President
of Germany’s central bank, the Bundesbank, said candidly that
the European Central Bank shouldn’t overstep its boundaries,
a direct reference to the idea that the ECB could embark on a
massive bond-buying program to keep Italian and Spanish bond
yields capped below predetermined levels (which were never
specified).
These measures would be sure to relieve stress in the Euro-zone,
which would be considered bullish for the British Pound; but in
their absence, the Sterling declined across the board, with the
GBPUSD falling by approximately 100-pips.
The British Pound’s losses on August 1 were compounded
by two other major events. Early in the day, Germany’s ruling
cabinet issued a statement railing against giving the Euro-zone’s
bailout fund, the European Stability Mechanism (ESM), a bank-
ing license.
Furthering the flight to safety for the day, which has proven to
be a negative occurrence for the British Pound, the Federal Re-
Industrial Production (YoY) (JUN) -4.3% -5.3% -1/8%
Manufacturing Production (YoY) (JUN) -4.3% -5.7% -1.8%
NIESR GDP Estimate (JUL) 0.2% - -0.7%
Visible Trade Balance (Pounds) (JUN) -£1,011 Million -£8,725 Million -£8,364 Million
PPI Output n.s.a. (YoY) (JUL) 1.7% 2% 2%
PPI Output Core n.s.a. (YoY)(JUL) 1.3% 1.6% 1.7%
RICS House Price Balance (JUL) -24% -23% -22%
was clear for the United Kingdom’s fundamentals to guide the Sterling. Surprisingly, this would be a strong development for the
world’s oldest currency.
The second week of August provided the British Pound with some solid footing to continue its journey higher across the board
for the month: both of July’s Industrial and Manufacturing Production data showed that the rates of contraction weren’t as rapid
as previously expected, perhaps a sign that growth in the short-term was rebounding. Although the PMI Manufacturing report
for July, released the week before, showed that the pace of contraction was accelerating, the PMI Construction report beat to the
upside, adding another notch in the ‘positive’ column for the Sterling.
Still, it is possible that the pickup in activity seen through July, much of which was responsible for the British Pound’s bull-ish behavior, was due to whatever knock-on effects the London Olympics may have provided. As such, it would not be surprising to see data start to decline again in late-third and early-fourth quarters.
With data largely supportive for
the rest of the month despite signs
that the British recession is likely
to persist for the near-term (see
the Economic Calendar Scorecard
below), the most important devel-
opment for the British Pound was
some mid-month commentary by
BoE Governor Mervyn King.
UK ECONOMIC DATA - AUGUST 2012
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over the coming months, another rate cut was seen as very-much off the table.
Investors priced in the decreased likelihood of more dovish policy set forth by the Bank of England over the coming weeks,
keeping the British Pound well-bid, especially against the U.S. Dollar and the commodity currencies, the Australian, Canadian,
and New Zealand Dollars. The Credit Suisse Overnight Index Swaps showed that rate cut expectations for the rest of the month
slid to zero, suggesting that the Bank of England wouldn’t implement more easy-money policy. By the end of the month, expec-
tations moderated back towards their early-August levels, with 25.2-basis points being priced out on August 31.
Overall, the British Pound finished the month in the middle of the pack among the majors, though it was far closer to the top
than to the bottom. Given the positive developments in the Euro-zone crisis, the Euro and the highly correlated Swiss Franc (the
Euro and the Swiss Franc have held a +0.94 daily correlation since September 6, 2011, when the Swiss National Bank imple-
mented the EURCHF floor at a 1.2000 exchange rate) led the way, with the EURGBP appreciating by +1.02% and the GBPCHF
depreciating by -1.03% in August. The British Pound was also slightly weaker against the Canadian Dollar (supported by its own
string of strong data in August), with the GBPCAD depreciating by -0.49%.
The British Pound’s outperformance against the Australian and New Zealand Dollars, the Japanese Yen, and the U.S. Dollar was
far more impressive than its underperformance against the aforementioned Euro, Swiss Franc, and Canadian Dollar. In August,
the GBPAUD appreciated by +2.89% as the weakening Chinese economy weighed on the high yielding Australian Dollar; the
GBPNZD appreciated by +1.84%; the GBPJPY appreciated by +1.53%; and the GBPUSD finished August up +1.19%. The British
Pound had a strong month, in what may have been a surprise to many, but the path is much less certain going forward. This will
be discussed on length in the British Pound Monthly Outlook: September.
EVENT EXPECTED ACTUAL PRIOR
Consumer Price Index (YoY) (JUL) 2.6% 2.3% 2.4%
Core Consumer Price Index (YoY) (JUL) 2.3% 2.1% 2.1%
Retail Price Index (YoY) (JUL) 3.2% 2.8% 2.8%
Claimant Count Rate (JUL) 4.9% 4.9% 4.9%
Jobless Claims Change (JUL) -5.9K 6.0K 1.0K
ILO Unemployment Rate (3M) (JUN) 8.0% 8.1% 8.1%
Employment Change (3M/3M) (JUN) 201K 165K 181K
Retail Sales (YoY) 3.3% 2.0% 3.3%
Public Finances (PSNCR) (Pounds) (JUL) -22.9 Billion - 0.9 Billion
Public Sector Net Borrowing (Pounds) (JUL) -1.8 Billion -3.2 Billion 12.2 Billion
BBA Loans for Home Purchase (JUL) 28,441 27,250 25,940
GDP (QoQ) (2Q) -0.5% -0.5% -0.7%
GDP (YoY) (2Q) -0.5% -0.6% -0.8%
Total Business Investment (YoY) (2Q) 1.7% 3.6% 14.8%
Mortgage Approvals (JUL) 47.3K 47K 44.2K
GfK Consumer Confidence Survey (AUG) -29 -27 -29
Nationwide House Prices n.s.a. (YoY) (AUG) -0.7% -2.2% -2.6%
In what was seen as a surprise,
Governor King noted that another
interest rate cut, which could be
implemented to further accom-
modate policy, would actually be
counterproductive. The reason?
It could cause further damage to
struggling banks’ balance sheets, as
margin requirements would change
forcing a reallocation of assets to
meet new capital requirements.
With comments out a few days
earlier that the Bank of England
was weighing stimulus options, this
development was confusing, need-
less to say.
“If that situation were to change, and it is possible that the impact on the net interest margins of small-er banks and building soci-eties might diminish, then that could be something that could be contemplat-ed,” said Governor King. But with
these pressures unlikely to diminish
UK ECONOMIC DATA - AUGUST 2012
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With Euro-zone pressures off the table in the near-term, especially since the start of August, data coming in better than expected,
and it appearing increasingly likely that a number of central banks outside of the United Kingdom would implement more easy-
money policies in the coming weeks (mainly the European Central Bank and the Federal Reserve, with an outside chance by the
Bank of Japan, and the Swiss National Bank continuing to build up its foreign currency reserves to keep the EURCHF floor at a 1.2000
exchange rate), the FTSE 100 was well-supported during August, finishing the month up +1.29%.
Of little surprise, the high beta technology sector led to the upside, and the financial sector trailed slightly despite falling off at the
end of the month. Because these two sectors’ performances tend to outperform the broader stock market, it is a strong sign for risk-
appetite in general that they led the way. As studies have shown, market rallies led by financial and technology are often indicative
of an early bull market, perhaps suggesting that more gains are on the way in the coming months.
Building off of a strong month in August, the British Pound, from a fundamental and a technical perspective, looks set to appreciate
further in September against a number of currencies, but especially the the Euro, and the U.S. Dollar.
As presented in the British Pound Monthly Review: August, data has been trending higher in the near-term, in the sense that it has
not been as bad as anticipated, perhaps leading to a recalibration of economists’ expectations about the British economy. Maybe,
the recession is slowing, and by the turn of the year, growth may start to trend positive once more.
(Still, it is possible that the pickup in activity seen through July, much of which was responsible for the British Pound’s bullish behav-
ior, was due to whatever knock-on effects the London Olympics may have provided. As such, it would not be surprising to see data
start to decline again in late-third and early-fourth quarters.)
GBP Technical Outlook for September: Bullish against USD (Higher GBPUSD)
September is an important month for the GBPUSD, for two reasons, one long-term and one short-term. In the short-term, off of the
July 22 and August 2 lows, with a parallel drawn to the July 27 high, the GBPUSD is in an ascending channel, with the uptrend sup-
ported by the 10-DMA which is above the 50-DMA and 200-DMA. If this channel holds, which it very well could on a dip given the
fact that channel support and the 50-DMA coincide at 1.5640/55, a logical target appears to be 1.6100 by month’s end, given the
progression of time and price.
FTSE 100 - August
September Outlook - GBP
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The 1.6100 target is confirmed given longer-term technicals, which suggest that a big decline in the pair is due in the fourth quarter
of 2012. We find this to be a potential outcome given the major descending channel off of the May 2011 and August 2011 highs,
with a parallel drawn to the October 2011 low. Topside channel resistance comes in at 1.6100, where price would also align with the
short-term ascending channel. Failure ahead of this point, with a weekly close below 1.5750, would expose fresh lows near 1.5500.
Dips towards 1.5750 should be bought, accordingly.
Month End Target: 1.6100
British Pound Technical Outlook for September: Bullish against USD (Lower EURGBP)
Despite the rally that took place in August, the EURGBP remains in a long-term descending channel off of the November 2011 and
February 2012 highs, with a parallel drawn to the January 2012 low. With price expected to hit topside channel resistance within the
first 10-days of September, another decline is appears around the corner.
However, with the EURGBP supported by an ascending trendline off of the July 23 and August 16 lows, an Ascending Triangle may
be forming, whose termination point comes on September 19. A weekly close above 0.7950 could expose a rally towards 0.8140
by the end of the month, which would negate our bearish bias for the EURGBP. However, given the expectation of a weaker Euro-
zone and dilutive measures by the ECB to support Italian and Spanish bond markets, we believe that, in the absence of a surprise
easy-money policy by the Bank of England, price should remain it is down trend. Accordingly, a bearish outcome targets 0.7660 by
September 30.
Month End Target: 0.7660
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