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

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

2010-03-25 18:38:00
David Song;Michael Wright,
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Trading the News: U.K. Mortgage Approvals

What’s Expected

Time of release:        03/29/2010 08:30 GMT, 04:30 EST
Primary Pair Impact :    GBPUSD
Expected:         46.5K
Previous:         48.2K

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

03.25_TTN1

January 2010 U.K. Mortgage Approvals

Mortgage approvals in the U.K. fell to an eight month low in January , and the data encourages a dour outlook for future growth as policy makers continue to see a risk for a protracted recovery. Lenders granted 48.2K loans during the month from a downward revision of 58.2K in December, which exceeded expectations for a 50.0K clip. At the same time, consumer credit  unexpectedly increased GBP 0.5B during the same period, after rising a revised GBP 0.3B in December, and conditions are likely to improve going forward as the expansion in monetary and fiscal policy continues to feed through the real economy. However, the ongoing weakness in the private sector could lead the Bank of England to maintain a dovish tone as the central bank aims to encourage a sustainable recovery in the U.K. 03.25_TTN2

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. 03.25_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 weaken to an annualized pace of 46.5K in February from 48.2K 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. The preliminary 4Q GDP report showed the growth rate expanded less-than-expected, weighed by a 3.1% drop in business investments, while a 1.2% jump in government spending helped to support economic activity throughout the last three-months of 2009. At the same time, a report by the Bank of England showed mortgage approvals by the six biggest banks in the U.K. unexpectedly slipped to 48.0K in February from 49.0K in the previous month, with the central bank noting that “a number of lenders reminded concerned about the risk of renewed falls in house prices and further rises in unemployment, while the British Bankers Association saw borrowing for home purchases increase to 35,276 during the same period from a revised 35,154 in January. Meanwhile, Bank of England board member Andrew Sentance held a cautious outlook for the economy during an interview with CNBC television and said that he would not “rule out some new shocks emerging on the financial front,” which could lead to a “double dip recession,” but went onto say that inflation remains above the central banks February forecast despite the ongoing weakness in the private sector.

The BoE held a dovish outlook in its quarter inflation report and said that the recovery was “somewhat weaker” than expected, with the ongoing slack in the real economy weighing on the outlook for growth and inflation. As a result, the central bank anticipates to see a moderate recovery this year and projects GDP to increase 1.4% in 2010 amid an initial forecasts for a 2.2% expansion, while inflation is projected to fall back below the 2% target later this year. Nevertheless, the central bank voted unanimously to hold the benchmark interest rate at 0.50% and maintain its asset purchase program at GBP 200B earlier this month, but went onto say that the “gradual recovery in the housing market appears to have slowed.” At the same time, the MPC held an improved outlook for the region and said that the recent economic developments suggests “that the momentum in growth may have been sustained into the first quarter,” and conditions are likely to improve going forward as the expansion in monetary and fiscal policy continues to feed through the real economy. Meanwhile, Chancellor of the Exchequer Alistair Darling reiterated that he expected GDP to expand 1.0%-1.5% this year and sees scope for the growth rate to rise 3.0%-3.5% in 2011, which is slightly lower from his initial forecast for a 3.25%-3.75% increase in economic activity, and policy makers are likely to maintain a loose stance throughout the first-half of the year in an effort to balance the risks for the economy.

Trading the given event risk favors a bearish outlook for Cable as economists forecast mortgage approvals to weaken further in February but nevertheless, an unexpected rise in borrowing could drive the exchange rate higher as the prospects for future growth improve. Therefore, if bank lending increases from the previous month, we will need to see a green, five-minute candle following the data to generate a buy entry on two-lots of GBP/USD. Once these conditions are fulfilled, we will set the initial stop at the nearby swing low or a reasonable distance, and this risk will establish our first target. Our second objective will be based on discretion, and we will move the stop on the second lot to breakeven once the first trade reaches its mark in order to preserve our profits.

In contrast, the ongoing weakness in the private sector paired with fears of a protracted recovery may lead banks to scale back on lending, and a drop in mortgage applications could lead the BoE to maintain a dovish outlook for future policy as they aim to balance the risks for the economy. As a result, if home loans slip to 46.5K or lower in February, we will favor a bearish outlook for Cable, and will institute the same setup for a short pound-dollar trade as the long position laid out above, just in reverse.

03.25_TTN4

Questions? Comments? Join us in the DailyFX Forum

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

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