GBP/USD: Trading the U.K. Mortgage Approvals Report

Published June 26th, 2009 - 09:52 GMT

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.



Trading the News: U.K Mortgage Approvals

What’s Expected

Time of release:        06/29/2009 09:30 GMT, 04:30 EST
Primary Pair Impact :    GBPUSD
Expected:         46.5K
Previous:         43.2K

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

Period

Data Released

Estimate

Actual

Pips Change

(1 Hour post event )

Pips Change

(End of Day post event)

April 2009

06/02/2009 09:30 GMT

41K

43K

-17

+190

March 2009

05/01/2009 09:30 GMT

40K

39K

+71

+142



April 2009 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.

March 2009 U.K. Mortgage Approvals

Banks in the U.K. approved 39K mortgage applications in March, which is the highest in nearly 10-months, and credit conditions may continue to improve over the near-term as policymakers take unprecedented steps to shore up Europe’s second largest economy. The data encouraged hopes that the downturn in the housing market may be nearing an a bottom however, as the nation faces its worst economic downturn in over half a century, home prices may continue fall lower over the near-term as households face a weakening labor market paired with fears of a protracted recession. As a result, the Bank of England held the benchmark interest rate at the record-low of 0.50% last month, and maintained a GBP 75B cap on its asset purchase program but nevertheless, the central bank may make addition steps to jump-start the ailing economy as the outlook for growth and inflation remains bleak

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

Lending activity in the U.K. is expected to improve throughout the second quarter, with economists forecasting mortgage approvals to reach a fresh yearly high of 46.5K in May, and the release could spark a rally in the British pound as investors raise bets for an economic recovery later this year. A report by Halifax showed house price unexpectedly jumped 2.6% in May, which is the biggest rise since 2002, while the British Bankers Association said mortgage approvals increased to 31.2K from a revised reading of 29.0K in April. In addition, the Royal Institution of Chartered Surveyors house price index increased to -44.1% from -58.7%, and the data suggests that the downturn in the housing market may be reaching a bottom as policymakers take unprecedented steps to steer the economy out of its worst recession in over half a century. Moreover, jobless claims in the U.K. rose at slower pace in May, with consumer confidence marking its biggest advance in two-years, and potential home buyers may continue to take advantage of lower home prices as credit conditions improve. At the same time, David Blanchflower, a former member of the MPC, anticipates jobless claims to average 100K per month ‘for the next year or so,’ while a report by the Local Government Association showed claims for unemployment benefits from white-collar employees jumped 154% in May from the previous year, and the downturn in the labor market could weigh on the outlook for future growth as households face fading demands for employment paired with a low supply of credit. Meanwhile, the BoE Minutes for June said that the ‘continued sharp contraction in output in the near term had receded somewhat,’ while Governor Mervyn King continued to hold a dour outlook for future growth, stating that the government may have to take further steps ‘before the banking system will be able to supply credit at a price and on a scale to finance a sustained recovery.’ As the central bank head expects a ‘slow and protracted recovery’ next year, the comments suggests banks remain reluctant to lend as the global economy faces its worst financial crisis since the Great Depression, and the BoE may expand its asset purchase program and utilized the remaining GBP 25B allotted by the Chancellor of the Exchequer in an effort to jump-start the ailing economy. As a result, speculation for further easing could weigh on the exchange rate as the housing market remains under pressure but nevertheless, long-term expectations for higher interest rates in the U.K. could lead the British pound higher over the near-term as market sentiment improves.

Trading the given event risk favors a bullish outlook for the British pound, and price action following the release could set the stage for a long Cable trade. Therefore, an in-line print to a rise above 46.5K in May would lead us to 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 set our initial stop at the nearby swing low (or reasonable distance), and this risk will determine our first target. The second target will be based on discretion, and in an effort to preserve our profits, we will move the stop on the second lot to breakeven once the first trade reaches its target.

In contrast, fears of a protracted recession paired with the downturn in the labor market could hamper demands for home purchases, and an unexpected drop in mortgage approvals is likely to weigh on the exchange rate as the housing market remains weak. As a result, a drop to 40K or lower would lead us to favor a bearish outlook for Cable, and we will follow the same strategy for a short pound-dollar trade as the long position mentioned above, just in reverse.


 

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