Fundamental Analysis – Explaining the United Kingdom Economic Data

Until recently, United Kingdom (UK) was a member of the European Union. To tell the truth, it is still a member, as the Article 50 (the official request to leave the union) is not yet triggered. While not in the Eurozone, the United Kingdom economic data and overall economic performance were always being viewed as part of Europe. This is mostly because of its proximity to the European Union. The single market, or more than five-hundred million people that make it, is an appealing trade target for any sovereign state. Now that the UK is about to leave, things must change for the UK economy and for the way business and trading with traditional partners will be done in the future.

What Data Matters for the United Kingdom?

The currency in the United Kingdom is the Great Britain Pound (GBP). Data that shows the state of the UK’s economy is influencing the value of the pound and brings volatility to the GBP denominated pairs. Speaking of the currency pairs that have the pound in their componence, the most important one is the GBPUSD. It is also being called “cable”, in the Forex trading language. The GBP currency pairs are more volatile than the Euro pairs, for example. Everyone is talking about the SNB (Swiss National Bank) dropping the peg on the 1.20 EURCHF floor and the meltdown that followed on that cross. Few know that the GBPCHF pair fell even more dramatically, as, like all GBP pairs, it is more volatile. The following economic data matters the most for the GBP pairs, and they are marked on the economic calendar as extremely important.

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The Official Bank Rate

This is the rate at which the Bank of England (BOE) lends to financial institutions overnight. Like any currency, the GBP will be strongly affected by any changes in the interest rate level. When it comes to the Bank of England, there is no press conference to follow the interest rate decision. This is in sharp contrast with the European Central Bank (ECB) and the Federal Reserve of the United States (Fed). As a reminder, the ECB is holding a press conference after every meeting, while the Fed after every two meetings or so. Also as a side note, the Monetary Policy Committee (MPC) in the United Kingdom, is meeting to discuss and set the interest rate every month. The ECB and the Fed, on the other hand, are doing that every six weeks. A press conference is to be held by the MPC only when the interest rate is changed, either raised or lowered. If not, no press conference follows. What would be the focus of Forex traders are other interested parties? They will focus on other things/factors/events/economic data that offer an educated guess regarding what the Bank of England will do in the future.
UK economic data -1

The MPC Official Bank Rate Votes

When the MPC is deciding not to change the interest rate on the pound, traders are focusing on the bank rate vote. This is a vote that shows, in this order, how many members decided to increase, decrease, or keep the rates on hold. There are nine members part of the MPC, and the bigger the spread between the votes, the bigger the uncertainty in the market. The vote has the power of offering information about the future intention the MPC has regarding the interest rates.For example, if the vote is 0-0-9, it is clear that the vote to keep rates unchanged was unanimous. However, if it is 1-1-7, traders will interpret it as there were two dissenting members, and this might be the start of a shift in the monetary policy and, in the end, interest rates will show a tightening cycle to start. All these result in a lot of volatility in the currency market in general and on the GBP pairs in particular. Both of two releases are equally important, as one is referring to the actual change in the interest rates level, and the other one to the future plans Bank of England members have.
UK economic data - 2

CPI – Inflation

Inflation in the United Kingdom is being treated exactly like anywhere in the world. The Bank of England’s mandate is related to the inflation values that affect the pound and the economic growth. As part of the mandate, inflation is targeted to be below or close to two percent. The higher the inflation, the more likely is for the Bank of England to come and raise the rates. The lower the inflation, the more likely the central bank will ease the monetary policy and will cut rates.

PMI’s

The United Kingdom is a service based economy, and this makes the PMI Services release to be the most important of the three releases. The other two are the Manufacturing and Construction PMI’s. They are treated/interpreted by traders in the same manner like any PMI or ISM in the United States, namely, based on the 50 level. Here, too, values above 50 show a sector that is expanding, while values below 50 show a sector that is contracting.

GDP (Gross Domestic Product)

The UK’s GDP comes in three pieces, with the first one being the most important one. It is called the Preliminary GDP. It is the most important one because the other two are rarely different. Even if they are different, the difference is insignificant.

Claimant Count Change

This is the jobs data in the United Kingdom and it is released together with the unemployment rate. As a rule of thumb, the lower the number, the better for the currency. This is not a number that shows the jobs that are created, like the NFP (Non-Farm Payrolls) in the United States. This is a number that shows the people that are applying for unemployment benefits. It is released monthly, about sixteen days after the month ends. It is a very good indicator about the shape of the UK economy.

Other Important Events

The Inflation Letter is being followed by a press conference where the Bank of England’s governor is explaining the bank’s perception of the current inflationary data and the drivers for future values. More than once, this press conference replaced the press conference that didn’t follow an MPC meeting. Press representatives are present and are asking questions, just like in the case of an ECB or Fed meeting. Extreme volatility levels are expected on the GBP.

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