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

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

2010-02-26 20:23:00
David Song;Michael Wright,
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Trading the News: U.K. Mortgage Approvals

What’s Expected
Time of release:        03/01/2010 09:30 GMT, 04:30 EST
Primary Pair Impact :    GBPUSD
Expected:         50.0K
Previous:         59.0K

Effect the U.K. Mortgage Approvals report has had over GBPUSD for the past 2 months

02.26_TTN1

December 2009 U.K. Mortgage Approvals

Approvals for home mortgages in the U.K. unexpectedly tumbled in December for the first time in more than a year, with the reading slipping to 59.0K from an upward revision of 60.0K in the month prior. At the same time, the final reading of the M4 money supply, the broadest measure of money growth, slid 1.1% in December to mark the biggest decline since records began in 1982, while the an annualized rate increased to 6.4% from the previous year. The data suggests that demand for home purchases may weaken further over the coming months falter as credit conditions tighten, and the Bank of England is likely to maintain a dovish policy stance in order to encourage a sustainable recovery. 02.26_TTN2

November 2009 U.K. Mortgage Approvals

Mortgage approvals in the U.K. advanced to the highest level since March 2008, adding evidence that the economy is emerging from recession.  Approvals rose to 60.5K in November to top forecasts for a rise to 58.0K, the Bank of England said today in London. Meanwhile, M4 money supply grew 0.9% from October, while the annualized rate retreated 2.2% in the three months through November.  As economic conditions improve, policy makers are likely to hold an enhanced outlook for future growth, but fears of a protracted recovery may lead the Bank of England to hold a dovish policy stance throughout the first-half of 2010 in order to support the ailing economy. 02.26_TTN3

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 Pound 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 Pound 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.
00001_GBP 00002_GBP

How To Trade This Event Risk

Mortgage approvals in the U.K. are expected to fall to 50.0K in January following the unexpected decline in the previous month, and the data could weigh on the exchange rate as policy makers continue to see a risk for a protracted recovery. A report by the National Statistics Office showed retail spending tumbled 1.2% from December, which exceeded forecasts for a 0.5% decline, while claims for jobless benefits unexpectedly increased 23.5K during the same period as businesses kept a lid on production and employment. At the same time, the Bank of England said the major banks in the U.K. granted 49K loans in January compared to a revised 60K in the previous month, while the British Bankers’ Association saw home loan approvals slip to 35.1K from 45.7K in December. The data reinforces a weakened outlook for future growth as households face tightening credit conditions paired with the deterioration in the labor market, but conditions may improve going into the second-half of the year as the expansion in monetary and fiscal policy continues to feed through the real economy.

Meanwhile the Bank of England held a dovish tone in its quarter inflation report release earlier this month and said that the recovery was “somewhat weaker” than previous expected, with the ongoing slack in the economy continuing to weigh on the outlook for future growth. As a result, the central bank anticipates to see a moderate recovery this year and projects GDP to expand 1.4% in 2010 amid an initial forecasts for a 2.2% expansion in the growth rate. Moreover, BoE Governor Mervyn King reiterated that he continues to see a “substantial margin” of slack in his letter to Chancellor of the Exchequer Alistair Darling, and went onto say subdued wage growth may continue to drag on economic activity as private-sector spending remains one of the leading drivers of growth. As a result, the central bank is widely anticipated to maintain a dovish stance at its policy meeting next Thursday, and we are likely to see the MPC maintain the option to expand its emergency program over the coming months as the central bank expects price pressures to fall back below the 2% target towards the end of the year.

Trading the given event favors a bearish outlook for Cable but nevertheless, price action following an enhanced report could set the stage for a long British Pound trade. Therefore, if we see mortgage approvals hold above the 55.0K mark, we will need to see a green, five-minute candle following the release to generate 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 establish our first target. The second objective will be based on discretion, and we will move the stop on the second lot to cost once the first trade reaches its target in order to preserve our profits.

On the other hand, the ongoing weakness in the labor market paired with subdued wage growth could limit demands for home loans, and a drop in mortgage approvals is likely to drag on the exchange rate as investors weigh the prospects for a sustainable recovery. As a result, if mortgage demands slip to 50.0K or lower, we will favor a bearish outlook for Cable, and will utilize the same strategy for a short pound-dollar trade as the long position laid out above, just in reverse.

02.26_TTN4

Questions? Comments? Join us in the DailyFX Forum

To discuss this report contact David Song, Currency Analyst: instructor@dailyfx.com

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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