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

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

2011-03-28 21:15:00
David Song, Currency Strategist
Share:

Trading the News: U.K. Mortgage Approvals

What’s Expected:

Time of release: 03/29/20118:30 GMT, 4:30 EST

Primary Pair Impact: GBPUSD

Expected: 46.0K

Previous: 45.7K

DailyFX Forecast: 40.0K to 48.0K

Why Is This Event Important:

Mortgage approvals in Britain are expected to increase another 46.0K in February, and the expansion in private sector activity could spark a bullish reaction in the British Pound as growth prospects improve. However, with the final 4Q GDP report expected to show a 0.6% contraction in economic activity, the slew of data could spark a mixed reaction in the GBP/USD, and the pair may consolidate going into the middle of the week as investors weigh the outlook for future policy. As the government’s budget-cutting program bears down on the outlook for future growth, the Bank of England may have little choice but to preserve its wait-and-see approach throughout the first-half of the year, and the central bank may continue to talk down the risk for inflation as policy makers expect the substantial margin of slack within the real economy to drag on price growth.

Recent Economic Developments

The Upside

Release

Expected

Actual

BBA Loans For Home Purchases (FEB)

29350

29923

Jobless Claims Change (FEB)

1.3K

-10.2K

PMI Construction (FEB)

52.8

56.5

The Downside

Release

Expected

Actual

Retail Sales ex Auto Fuel (MoM) (FEB)

-0.6%

-1.0%

Nationwide Consumer Confidence (FEB)

47

38

GDP (4Q P)

-0.5%

-0.6%

As building activity in the U.K. expands for the second consecutive month in February, with the labor market showing a mild improvement from the previous month, mortgage lending may improve throughout the coming months as the central bank continues to support the real economy. However, as consumer confidence falters, with households scaling back on spending, private sector activity may wane in the first-half of the year, and the central bank may see scope to keep the benchmark interest rate at the record-low for an extended period of time as it aims to encourage a sustainable recovery. In turn, a dismal lending report is likely to bear down on interest rate expectations, and the British Pound may struggle to hold its ground as BoE maintains a cautious outlook for the region.

Potential Price Targets For The Release

GBPUSD_Trading_the_Change_in_U.K._Mortgage_Approvals_body_ScreenShot007.png, GBP/USD: Trading the Change in U.K. Mortgage Approvals

How To Trade This Event Risk

Expectations for a second consecutive rise in U.K. mortgage approvals certainly reinforces a bullish outlook for the sterling, and price action following the release could pave the way for a long British Pound trade as the outlook for future growth improves. Therefore, if approvals for home loans increase 60.0K or greater in February, we will need to see a green, five-minute candle subsequent to the data to establish 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 from the entry, and this risk will generate our first target. The 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.

On the other hand, demands for home loans may deteriorate as households cope with rising energy prices paired with the ongoing weakness within the labor market, and a dismal lending report could bear down on the exchange rate as the fundamental outlook remains clouded with high uncertainty. As a result, if mortgage approvals increase less than 45.0K from the previous month, we will utilize the same strategy for a short pound-dollar trade as the long position laid out above, just in reverse.

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

Period

Data Released

Estimate

Actual

Pips Change

(1 Hour post event )

Pips Change

(End of Day post event)

Jan 2011

03/01/2011 9:30 GMT

42.9K

45.7K

-4

-47

January 2011 U.K. Mortgage Approvals

U.K. mortgage approvals increased 45.7K in February after rising a revised 42.7K in the month prior, while consumer credit unexpectedly contracted GBP 0.3B after expanding GBP 0.8B during the same period. As private sector activity remains subdued, with households facing tight credit conditions paired with the protracted recovery in employment, the Bank of England may see scope to support the real economy throughout the first-half of the year as it aims to balance the risks for the region. However, there could be a growing shift within the MPC as policy makers expect the headline reading for inflation to average 4 to 5 percent throughout 2011, and the BoE may show an increased willingness to lift the benchmark interest rate off the record-low this year as its credibility to ensure price stability comes under increased scrutiny. Indeed, currency traders showed a mixed reaction to the slew of U.K. data, with the GBP/USD maintain the narrow range prior to the release, but the British Pound struggled to hold its ground during the North American trade as the exchange rated ended the day at 1.6260.

GBPUSD_Trading_the_Change_in_U.K._Mortgage_Approvals_body_ScreenShot006.png, GBP/USD: Trading the Change in U.K. Mortgage Approvals

Questions? Comments? Join us in the DailyFX Forum

View the Expo Presentation on ‘Trading the News’ For Additional Resources

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

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

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