UK Forex Markets Update - August/September 2012 by jwebber81


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									UK Financial
August/September 2012

Around the globe, August was a rather boring                        serve announced after its monthly monetary policy meeting
month: equity market volumes dropped by 30-60%                      that no new stimulus would be added to the market.
in some cases as investors abandoned their trade
screens in favor of vacations. This is not unusual;                 The GBPUSD closed August 1 at 1.5533 after opening up at
August typically is characterized by lower market                   1.5674, a disappointing beginning to the month.
participation rates.
                                                                    The ECB Dilemma
Despite these conditions, August was still a very
exciting month for the British Pound.
                                                                    Central bank chatter continued to be the driving factor
                                                                    behind the British Pound’s price action on the second day
 August 2012 Recap                                                  of the month, as the European Central Bank disappointed
                                                                    market participants by failing to announce major measures

As has been the case for the past several months, many of the       to support Italian and Spanish bond markets. Expectations

key drivers influencing the British Pound were rooted in the        were high ahead of the meeting, which sent the GBPUSD

European debt crisis. On August 1, Jens Weidmann, President         back to 1.5677, but upon the disappointment, the GBPUSD

of Germany’s central bank, the Bundesbank, said candidly that       came crashing back down, finishing the day at 1.5511.

the European Central Bank shouldn’t overstep its boundaries,
a direct reference to the idea that the ECB could embark on a       Perhaps in what would be a testament to how fickle finan-

massive bond-buying program to keep Italian and Spanish bond        cial markets were in the month of August, by Friday, senti-

yields capped below predetermined levels (which were never          ment was completely reversed on the ECB decision, with

specified).                                                         many believing that the ECB was indeed still working on a
                                                                    bond-buying program. This sentiment alone helped set the

These measures would be sure to relieve stress in the Euro-zone,    tone for the British Pound for the month of August, sending

which would be considered bullish for the British Pound; but in     the GBPUSD back up to 1.5641.

their absence, the Sterling declined across the board, with the
GBPUSD falling by approximately 100-pips.                           With the ECB on board for a bond-buying program, or at
                                                                    least with that being the prevailing sentiment in the market,

The British Pound’s losses on August 1 were compounded              the British Pound was set to see relief given its proximity

by two other major events. Early in the day, Germany’s ruling       and relationship to the Euro-zone crisis; Britain’s export-

cabinet issued a statement railing against giving the Euro-zone’s   ers and financial sector have exceptionally strong ties to

bailout fund, the European Stability Mechanism (ESM), a bank-       continental Europe.

ing license.
Furthering the flight to safety for the day, which has proven to    With the Euro-zone crisis on the sidelines for the time be-

be a negative occurrence for the British Pound, the Federal Re-     ing – as it would be for the rest of the month – the path

                           , 2012 - All rights reserved
was clear for the United Kingdom’s fundamentals to guide the Sterling. Surprisingly, this would be a strong development for the
world’s oldest currency.

The second week of August provided the British Pound with some solid footing to continue its journey higher across the board
for the month: both of July’s Industrial and Manufacturing Production data showed that the rates of contraction weren’t as rapid
as previously expected, perhaps a sign that growth in the short-term was rebounding. Although the PMI Manufacturing report
for July, released the week before, showed that the pace of contraction was accelerating, the PMI Construction report beat to the
upside, adding another notch in the ‘positive’ column for the Sterling.

                                                                                                   Still, it is possible that the
 UK ECONOMIC DATA - AUGUST 2012                                                                    pickup in activity seen
                                                                                                   through July, much of
                  EVENT                        EXPECTED           ACTUAL             PRIOR         which was responsible for
                                                                                                   the British Pound’s bull-
Nationwide House Prices (YoY) (JUL)              -2.6%             -1.9%             -1.5%
                                                                                                   ish behavior, was due to
PMI Manufacturing (JUL)                           45.4              48.4              48.4         whatever knock-on effects
                                                                                                   the London Olympics may
PMI Construction (JUL)                            50.9              48.7              48.2
                                                                                                   have provided. As such, it
BOE Rate Decision (Aug 2)                        0.50%             0.50%             0.50%
                                                                                                   would not be surprising to
BOE Asset Purchase Target (AUG)               £375 Billion      £375 Billion      £375 Billion     see data start to decline
                                                                                                   again in late-third and
PMI Services (JUL)                                51.0              51.6              51.3
                                                                                                   early-fourth quarters.
Industrial Production (YoY) (JUN)                -4.3%             -5.3%             -1/8%
                                                                                                   With data largely supportive for
Manufacturing Production (YoY) (JUN)             -4.3%             -5.7%             -1.8%
                                                                                                   the rest of the month despite signs
NIESR GDP Estimate (JUL)                         0.2%                 -              -0.7%         that the British recession is likely

Visible Trade Balance (Pounds) (JUN)         -£1,011 Million   -£8,725 Million   -£8,364 Million
                                                                                                   to persist for the near-term (see
                                                                                                   the Economic Calendar Scorecard
PPI Output n.s.a. (YoY) (JUL)                    1.7%               2%                2%
                                                                                                   below), the most important devel-
PPI Output Core n.s.a. (YoY)(JUL)                1.3%              1.6%              1.7%          opment for the British Pound was
                                                                                                   some mid-month commentary by
RICS House Price Balance (JUL)                   -24%              -23%              -22%
                                                                                                   BoE Governor Mervyn King.

                             , 2012 - All rights reserved
                                                                                             In what was seen as a surprise,
UK ECONOMIC DATA - AUGUST 2012                                                               Governor King noted that another
                                                                                             interest rate cut, which could be
                     EVENT                    EXPECTED         ACTUAL            PRIOR
                                                                                             implemented to further accom-

Consumer Price Index (YoY) (JUL)                 2.6%            2.3%            2.4%        modate policy, would actually be
                                                                                             counterproductive. The reason?
Core Consumer Price Index (YoY) (JUL)            2.3%            2.1%            2.1%

Retail Price Index (YoY) (JUL)                   3.2%            2.8%            2.8%        It could cause further damage to
                                                                                             struggling banks’ balance sheets, as
Claimant Count Rate (JUL)                        4.9%            4.9%            4.9%
                                                                                             margin requirements would change
Jobless Claims Change (JUL)                      -5.9K           6.0K            1.0K        forcing a reallocation of assets to
                                                                                             meet new capital requirements.
ILO Unemployment Rate (3M) (JUN)                 8.0%            8.1%            8.1%
                                                                                             With comments out a few days
Employment Change (3M/3M) (JUN)                  201K            165K            181K
                                                                                             earlier that the Bank of England
Retail Sales (YoY)                               3.3%            2.0%            3.3%        was weighing stimulus options, this
                                                                                             development was confusing, need-
Public Finances (PSNCR) (Pounds) (JUL)        -22.9 Billion        -           0.9 Billion
                                                                                             less to say.
Public Sector Net Borrowing (Pounds)
                                              -1.8 Billion    -3.2 Billion    12.2 Billion

BBA Loans for Home Purchase (JUL)               28,441          27,250          25,940
                                                                                             “If that situation were to
                                                                                             change, and it is possible
GDP (QoQ) (2Q)                                   -0.5%          -0.5%            -0.7%       that the impact on the net
GDP (YoY) (2Q)                                   -0.5%          -0.6%            -0.8%       interest margins of small-
                                                                                             er banks and building soci-
Total Business Investment (YoY) (2Q)             1.7%            3.6%           14.8%
                                                                                             eties might diminish, then
Mortgage Approvals (JUL)                         47.3K           47K             44.2K       that could be something
                                                                                             that could be contemplat-
GfK Consumer Confidence Survey (AUG)              -29             -27             -29
                                                                                             ed, ” said Governor King. But with
Nationwide House Prices n.s.a. (YoY)
                                                 -0.7%          -2.2%            -2.6%       these pressures unlikely to diminish

over the coming months, another rate cut was seen as very-much off the table.

Investors priced in the decreased likelihood of more dovish policy set forth by the Bank of England over the coming weeks,
keeping the British Pound well-bid, especially against the U.S. Dollar and the commodity currencies, the Australian, Canadian,
and New Zealand Dollars. The Credit Suisse Overnight Index Swaps showed that rate cut expectations for the rest of the month
slid to zero, suggesting that the Bank of England wouldn’t implement more easy-money policy. By the end of the month, expec-
tations moderated back towards their early-August levels, with 25.2-basis points being priced out on August 31.

Overall, the British Pound finished the month in the middle of the pack among the majors, though it was far closer to the top
than to the bottom. Given the positive developments in the Euro-zone crisis, the Euro and the highly correlated Swiss Franc (the
Euro and the Swiss Franc have held a +0.94 daily correlation since September 6, 2011, when the Swiss National Bank imple-
mented the EURCHF floor at a 1.2000 exchange rate) led the way, with the EURGBP appreciating by +1.02% and the GBPCHF
depreciating by -1.03% in August. The British Pound was also slightly weaker against the Canadian Dollar (supported by its own
string of strong data in August), with the GBPCAD depreciating by -0.49%.

The British Pound’s outperformance against the Australian and New Zealand Dollars, the Japanese Yen, and the U.S. Dollar was
far more impressive than its underperformance against the aforementioned Euro, Swiss Franc, and Canadian Dollar. In August,
the GBPAUD appreciated by +2.89% as the weakening Chinese economy weighed on the high yielding Australian Dollar; the
GBPNZD appreciated by +1.84%; the GBPJPY appreciated by +1.53%; and the GBPUSD finished August up +1.19%. The British
Pound had a strong month, in what may have been a surprise to many, but the path is much less certain going forward. This will
be discussed on length in the British Pound Monthly Outlook: September.

                             , 2012 - All rights reserved
 FTSE 100 - August

With Euro-zone pressures off the table in the near-term, especially since the start of August, data coming in better than expected,
and it appearing increasingly likely that a number of central banks outside of the United Kingdom would implement more easy-
money policies in the coming weeks (mainly the European Central Bank and the Federal Reserve, with an outside chance by the
Bank of Japan, and the Swiss National Bank continuing to build up its foreign currency reserves to keep the EURCHF floor at a 1.2000
exchange rate), the FTSE 100 was well-supported during August, finishing the month up +1.29%.

Of little surprise, the high beta technology sector led to the upside, and the financial sector trailed slightly despite falling off at the
end of the month. Because these two sectors’ performances tend to outperform the broader stock market, it is a strong sign for risk-
appetite in general that they led the way. As studies have shown, market rallies led by financial and technology are often indicative
of an early bull market, perhaps suggesting that more gains are on the way in the coming months.

 September Outlook - GBP
Building off of a strong month in August, the British Pound, from a fundamental and a technical perspective, looks set to appreciate
further in September against a number of currencies, but especially the the Euro, and the U.S. Dollar.

As presented in the British Pound Monthly Review: August, data has been trending higher in the near-term, in the sense that it has
not been as bad as anticipated, perhaps leading to a recalibration of economists’ expectations about the British economy. Maybe,
the recession is slowing, and by the turn of the year, growth may start to trend positive once more.

(Still, it is possible that the pickup in activity seen through July, much of which was responsible for the British Pound’s bullish behav-
ior, was due to whatever knock-on effects the London Olympics may have provided. As such, it would not be surprising to see data
start to decline again in late-third and early-fourth quarters.)

GBP Technical Outlook for September:
Bullish against USD (Higher GBPUSD)

September is an important month for the GBPUSD, for two reasons, one long-term and one short-term. In the short-term, off of the
July 22 and August 2 lows, with a parallel drawn to the July 27 high, the GBPUSD is in an ascending channel, with the uptrend sup-
ported by the 10-DMA which is above the 50-DMA and 200-DMA. If this channel holds, which it very well could on a dip given the
fact that channel support and the 50-DMA coincide at 1.5640/55, a logical target appears to be 1.6100 by month’s end, given the
progression of time and price.

                            , 2012 - All rights reserved
The 1.6100 target is confirmed given longer-term technicals, which suggest that a big decline in the pair is due in the fourth quarter
of 2012. We find this to be a potential outcome given the major descending channel off of the May 2011 and August 2011 highs,
with a parallel drawn to the October 2011 low. Topside channel resistance comes in at 1.6100, where price would also align with the
short-term ascending channel. Failure ahead of this point, with a weekly close below 1.5750, would expose fresh lows near 1.5500.
Dips towards 1.5750 should be bought, accordingly.

Month End Target: 1.6100

British Pound Technical Outlook for September:
Bullish against USD (Lower EURGBP)

Despite the rally that took place in August, the EURGBP remains in a long-term descending channel off of the November 2011 and
February 2012 highs, with a parallel drawn to the January 2012 low. With price expected to hit topside channel resistance within the
first 10-days of September, another decline is appears around the corner.

However, with the EURGBP supported by an ascending trendline off of the July 23 and August 16 lows, an Ascending Triangle may
be forming, whose termination point comes on September 19. A weekly close above 0.7950 could expose a rally towards 0.8140
by the end of the month, which would negate our bearish bias for the EURGBP. However, given the expectation of a weaker Euro-
zone and dilutive measures by the ECB to support Italian and Spanish bond markets, we believe that, in the absence of a surprise
easy-money policy by the Bank of England, price should remain it is down trend. Accordingly, a bearish outcome targets 0.7660 by
September 30.

Month End Target: 0.7660

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