Fundamental Analysis – Explaining the United Kingdom Economic Data

Until recently, the United Kingdom (UK) was a member of the European Union. In actual fact, it is still a member, as 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 have always been viewed as being part of Europe, which is mostly because of its proximity to the Eurozone. The single market, or the more than 500 million people that form 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 influences 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 GBP/USD, which is also called “cable”, in the Forex trading language. The GBP currency pairs are more volatile than the euro pairs, for example. Everyone talks about the Swiss National Bank (SNB) dropping the peg on the 1.20 EUR/CHF floor and the meltdown that followed on that cross. Few are aware that the GBP/CHF 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. In the case of 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 holds a press conference after every meeting, and the Fed after every two meetings or so. Also as a side note, the Monetary Policy Committee (MPC) in the United Kingdom meets to discuss and set the interest rate every month. The ECB and the Fed, on the other hand, do that every 6 weeks. A press conference is held by the MPC only when the interest rate is changed (either raised or lowered); if not, no press conference follows.

So what would be the focus of Forex traders and 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 decides not to change the interest rate on the pound, traders focus 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 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 meaning that there were two dissenting members, which might signal the start of a shift in the monetary policy, and in the end, interest rates will show the start of a tightening cycle. All of these result in a lot of volatility in the currency market in general, and on the GBP pairs in particular. Both of the releases are equally important, as one refers to the actual change in the interest rate 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 treated exactly the same as anywhere in the world. The Bank of England’s mandate is related to the inflation values that affect the pound, and to economic growth. As part of the mandate, inflation is targeted to be below or close to 2%. The higher the inflation figure, the more likely is for the Bank of England to intervene and raise the rates. The lower the inflation figure, the more likely it will ease the monetary policy and will cut rates.

PMIs

The United Kingdom has a service-based economy, and this makes the PMI Services release the most important of the three releases. The other two are the Manufacturing and Construction PMIs. They are treated/interpreted by traders in the same manner as 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.

Gross Domestic Product (GDP )

The UK’s GDP comes in three parts, the first one being the most important one. This is called the Preliminary GDP. It is the most important one because the other two rarely differ, and 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 figure, 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. Rather it is a number that shows the people who are applying for unemployment benefit. It is released monthly, about 16 days after the month ends, and is a very good indicator of the shape of the UK economy.

Other Important Events

The Inflation Letter is followed by a press conference at which the Bank of England’s governor explains 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 ask questions, just as in the case of an ECB or Fed meeting. Extreme volatility levels are expected on the GBP.

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