GBP/USD: Trading the Change in U.K. Mortgage Approvals

Trading the News: U.K. Mortgage Approvals

Why Is This Event Important:

With the recovery in the U.K. gathering pace, a rise in mortgage lending is likely to reinforce an improved outlook for future growth, which could support the recent rebound in the GBP/USD. However, as households face tightening credit conditions paired with the deterioration in the labor market, the ongoing weakness in the private sector could lead to a drop in borrowing activity as banks seek to clean up their balance sheets.

What’s Expected:
Time of release:        06/02/2010 08:30 GMT, 4:30 EST
Primary Pair Impact :    GBPUSD
Expected:         49.5K
Previous:         48.9K

Will This Be Market Moving (Scenarios):

Mortgage approvals in Britain are forecasted to expand 49.5K in April after increasing 48.9K in the previous month, while consumer credit is expected to rise GBP 0.3B for the second consecutive month as household confidence improves. A rise in lending activity could reinforce an enhanced outlook for the private sector, and conditions are likely to improve going forward as the central bank maintains a loose stance on monetary policy.

The Upside

The rebound in private sector consumption accompanied by the recent improvements in the housing sector could lead to a higher-than-expected print for April, which could stoke a bullish reaction in the British pound as the prospects for a sustainable recovery improve. At the same time, the Bank of England may look to ramp up its economic assessment and show an increased willingness to normalize policy further in the second half of the year, which would spur a rise in interest rate expectations.

The Downside

However, as the government stimulus tapers off, with the new coalition aiming to cut government spending, banks may look to scale back on lending as the BOE continues to see a “substantial margin of spare capacity” in the real economy. In addition, Governor Mervyn King warned that some members of the MPC “placed more weigh on the downside risks” for growth as a result of the “constraints on credit supply and recent developments in the euro-area,” and a dismal lending report could lead the central bank to support the economy throughout the second-half of the year as it aims to balance the risks for growth and inflation.

How To Trade This Event Risk

Trading the given event risk favors a bullish outlook for the British Pound as market participants expect lending activity to expand for the second consecutive month, and price action following the release could set the stage for a long Cable trade as the prospects for future growth improves. Therefore, if mortgage approvals increase 49.5K or greater in April, we will need a green, five-minute candle subsequent to the data to establish a buy entry on two lots of GBP/USD. Once these conditions are met, we will set the initial stop at the nearby swing low or a reasonable distance, and this risk will generate our first objective. The second target will be based on discretion, and we will move the stop on the second lot to cost once the first trade reaches its mark in an effort to lock-in our profits.

On the other hand, the ongoing slack within the economy paired with the tightening credit conditions may weigh on borrowing activity, and banks may look to keep a lid on lending over the medium-term as the policy makers hold a cautious outlook for the region. As a result, if mortgage approvals slip to 47.0K or lower, we will favor a bearish outlook for Cable, and will implement the same strategy for a short pound-dollar trade as the long position mentioned above, just in reverse.

Impact that the U.K. Mortgage Approvals has had on GBP during the last month

March 2010 U.K. Mortgage Approvals

Mortgage approvals in U.K. increased for the first time in four months as home lending increased 48.9K in March, which fell short of expectations for a 49.0K rise. At the same time, a separate report showed consumer credit increased GBP 0.3B during the same period after expanding a revised GBP 0.6B in the previous month versus expectations for a GBP 0.4B rise, and tightening credit conditions may continue to weigh on the real economy going forward as banks restore their balance sheets. As policy makers continue to see a risk for a protracted recovery, the Bank of England is widely anticipated to hold the benchmark interest rate at 0.50% and maintain its GBP 200B asset purchase program this month, and Governor Mervyn King may retain a dovish outlook for monetary policy as the MPC aims to balance the downside risks for growth and inflation.

What To Look For Before The Release

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:

Bullish Scenario: 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.

Bearish Scenario: 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.

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To discuss this report contact David Song, Currency Analyst: dsong@fxcm.com