In the UK, we saw fundamental data come in a bit better than expected, which helped the GBP to rally against the USD, but it fell back against the EUR, AUD, NZD, and JPY, showing that while it was better than the laggard USD, the GBP was shedding part of its strong gains from last week - gains that may have been overdone due to M&A flows.
For example, here is a look at the AUD/GBP:
- Here we see the strong rally in favor of the GBP we saw last week, as we hit a high near 1.5970.
- We have now eased off that high by about 250 pips as we test the 61.8% retracement of last week's full upswing - an important support as we head into the NY trading session.
- We have moved below all of our moving averages, and are currently in a downtrend channel.
- If we are able to move below the 1.5725 area, we will be trading back in the range we had mid-August, and it open up the door for this pair to fall back down to 1.5650 and our lows from last week near 1.5560.
Fundamental Bias Shift in Today's Data/Action:
Last week in the UK we saw an increase in jobless claims as well as BOE Meeting Minutes that showed the central bank unanimously calling for rates to stay on hold and dangling the prospect of more bond buying via quantitative easing if needed. Both of these developments were negative from a fundamental standpoint. Still, the GBP managed to rally despite the poor fundamentals as Hewlett Packard bought Autonomy Corp. for roughly $10 billion, which meant the US company had to convert to GBP, boosting the currency.
This week we see the GBP falling back down to earth, and other higher yielders beating it.
Overnight, the role of the fundamental data from the UK is also reversed as we saw some better than expected figures from mortgage approvals and manufacturing orders, despite the softer GBP overall.
The rosier outlook on manufacturing orders was a surprise considering the weakness in global manufacturing in July. Still, the outlook is cloudy ahead.
From Bloomberg: A U.K. index of factory orders rose from a three-month low in August and consumer-goods manufacturers predict a strong rise in output in the next quarter, the Confederation of British Industry said. The gauge of orders climbed to 1 from minus 10 in July.
Manufacturing order books are holding up, said Richard Woolhouse, the CBI's head of fiscal policy. But the risks to manufacturing activity and business confidence have, if anything, increased due to market volatility and the recalibration of growth expectations worldwide. Concerns about growth in the U.S. and the euro area present further challenges to the manufacturing recovery.
The measure of expected average selling prices increased to 9 in August from 4 in July, the CBI said. The gauge of manufacturers' stockpiles rose 2 points to 14, the highest since December 2009, and an index of the volume of output advanced to 13 from 6.
Mortgage approvals also came in better than expected overnight, with the number of new mortgages for home purchase climbing to 33.4K for the month of July:
From FT.com: Banks approved 74,590 mortgages in July compared with an average 69,803 per month for the previous six months, according to data from the British Bankers' Association. Banks also approved more remortgages in July. Meanwhile, there was no new net lending to non-financial companies, following an average £1.3bn contraction in monthly lending for the previous six months.
Gross mortgage lending of £7.6bn was similar to the amount lent in June, while net lending increased by £900m.
Economists at Barclays Capital said in a note to clients: It is possible that the upticks in the number and value of mortgage approvals portends an improvement in net lending in future months, but the historical correspondence between the series is not strong enough to elevate this prediction to 'expectation' as opposed to 'hope'.
We can consider both of these second tier indicators for the UK economy, but they are both leading indicators, and both show some improvement. Therefore, the GBP has been unable so far today to benefit.
Overall, there is a slight move towards the GBP from a fundamental perspective, but it has not been reflected in GBP price. We also still have several important releases to look out for in the UK this week that can help determine sterling's direction:
- CBI Realized Sales on Thursday - a measure of retail store sales over the year - is expected to slide to -10 from -5 in August.
- On Friday, we get the 2nd release of GDP for the 2nd quarter, with growth expected to remain at the preliminary reading's 0.2% q/q.
- Also on Friday, the UK releases its preliminary reading on 2nd quarter business investment, which showed a 3.2% decline in the 1st quarter.
- And finally we get a look at the services sector in the form of the Index of Services 3m/3m for June, which is expected to show 0.6% growth, about half of what we saw in May.
Chief Market Analyst