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

Published July 27th, 2009 - 02:23 GMT

Mortgage approvals in the U.K. are expected to improve for the fifth consecutive month in June, with economists forecasting a rise to 47.0K from 43.4K in the previous month, and a rebound in lending activity is likely to encourage an enhanced outlook for future growth as policymakers anticipate the economy to emerge from the recession later this year.



Trading the News: U.K. Mortgage Approvals

What’s Expected

Time of release:                  07/29/2009 08:30 GMT, 04:30 EST

Primary Pair Impact :          GBPUSD

Expected:                              47.0K

Previous:                               43.4K

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

 


May 2008 U.K. Mortgage Approvals

Approvals for home-loans in the U.K. tipped higher to43.4K in May from 43.2K amid expectations for a rise to 46.0K, and the slump in the housing market may continue to drag on the real economy as banks remain reluctant to lend. At the same time, MPC member Kate Barker continued to hold a dour outlook for the mortgage market, stating that credit conditions remains ‘some way away from normal,’ and the comments reinforce a dour outlook for lending activity as the global financial system remains fragile. Meanwhile, the Bank of England continued to hold the benchmark interest rate at the record-low of 0.50% earlier this month and maintained its GBP 125B in asset purchases in an effort to jump-start the ailing economy, and market participants speculate the central bank will utilize the remaining GBP 25B allotted by the Chancellor of the Exchequer in order to support a sustainable recovery.

 


April 2008 U.K. Mortgage Approvals

U.K. mortgage approvals increased to a yearly high of 43K in June, with household confidence improving during the same period, and the data suggests that the downturn in the housing is nearing a bottom as the government takes extraordinary steps to steer the economy out of the worst recession since World War II. At the same time, BoE Deputy Governor Charles Bean said lending practices may ‘remain impaired for some while,’ as the global financial system remains weak, and as a result, the central bank expanded its asset purchase program by GBP75B to GBP 125B last month in order to foster a sustainable recovery. Nevertheless, as Governor Mervyn King hold a dovish outlook for price growth, the bank is widely expect to hold borrowing costs at the record low throughout the rest of the year however, long-term expectations for interest rates may continue to drive the British pound higher against its currency counter-parts.

 


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.





How To Trade This Event Risk

Mortgage approvals in the U.K. are expected to improve for the fifth consecutive month in June, with economists forecasting a rise to 47.0K from 43.4K in the previous month, and a rebound in lending activity is likely to encourage an enhanced outlook for future growth as policymakers anticipate the economy to emerge from the recession later this year. At the same time, the advanced 2Q GDP reading reinforced a weakening outlook for Europe’s second largest economy, with the annual rate of growth contracting 5.6% from the previous year to mark the biggest decline since recordkeeping began in 1955, and fears of a protracted downturn may continue to weigh on economic activity going forward as households face a weakening labor market paired with tightening credit conditions. Moreover, a report by the Bank of England showed home equity withdrawals fell at a record pace during the first quarter, while the International Labour Organization’s gauge for unemployment rose to 2.38M in May to mark the highest reading since 1995, and the slump in the housing market is likely to carry though into the following year as banks remain reluctant to lend. As a result, Chancellor of the Exchequer Alistair Darling called on banks to lower borrowing costs for small firms, stating lenders must ‘live up to the promises they made’ as the government pledged GBP 1.4T in bailouts to prevent the collapse of financial institutions in the U.K. however, banks may continue to scale back on lending practices as the global financial system remains fragile. Meanwhile, the BoE Minutes showed the MPC voted unanimously to keep a floor on the benchmark interest rate and to maintain its GBP 125B in asset purchases in July, with the central bank highlighting a lack of evidence to expand its asset purchases amid calls from the British Chambers of Commerce to utilize the remaining GBP 25B allotted by the Chancellor of the Exchequer. In addition, the statement said ‘the momentum going into the second half of the year was greater than the committee had expected in May,’ with the outlook for inflation improving, and the comments suggests that the BoE will continue to uphold its current policy in place as policymakers anticipate to see a sustainable recovery later this year. As the central bank raises its outlook for future growth, market participants forecast the MPC to tighten policy over the next 12 months, and the rise in market sentiment may support the rise in the British pound over the near-term as risk trends continue to dictate price action in the currency market.

Expectations for a rise in mortgage approvals favors a bullish outlook for Cable, and price action following the release could set the stage for a long pound-dollar trade. Therefore, if approvals for home-loans rise to 47.0K or higher in June, we will look for a green, five-minute candle following the release to confirm a buy entry on two-lots of GBP/USD. Once these conditions are met, we will place our 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 break even once the first trade reaches its target in order to preserve our profits.

On the other hand, tighten credit conditions paired with the slump in the housing market is likely to drag on economic activity going forward, and fears of a protracted downturn may drag on the exchange rate as investors weigh the outlook for future growth. As a result, if mortgage approvals unexpectedly fall to 41.0K or lower in June, we will favor a bearish forecast for Cable, and will follow the same strategy for a short pound-dollar trade as the long position mentioned above, just in reverse.

 


 


Visit the
DailyFX Forex Stream for Real-Time News and Market Updates

You may also like