The UK Series: How News Can Change the Cable 5/6

30 September, 2013

Technical analysis is widely used in forex. However, in reference to the cable, the importance of fundamental analysis must not be underestimated. Regular economic events continuously inflate the cable.

It is a key advantage that the GBP is traded against the USD. When positive data comes out from the UK, the cable sharply increases. On 18th September, the BoE unanimously ruled out future use of Quantitative Easing (QE). They also indicated that they expect future UK GDP to expand beyond initial estimates, leading to a 70 pip increase.

 

Chart1

Additionally, any negativity regarding the US economy can really catapult the cable. This has happened on more than the odd occasion, providing the cable with several unexpected boosts. The best example being on 10th July, when the Chairman of the Federal Reserve, Ben Bernanke, spoke in a pessimistic tone regarding the US recovery. He even indicated that further QE may be needed in the future. Overall, this contributed towards the cable accelerating nearly 300 pips.

 

Chart2

 

August

In early August, UK manufacturing confidence reached a 28 month high, sending euphoria over the prospect that the UK unemployment rate would consequently decrease. The cable increased by 151 pips on the news.

 

Chart3

 

In mid-August, optimism regarding a UK economic resurgence was in full transition. Retail sales expanded 3.0% over the previous year, while jobless claims decreased for the ninth consecutive month. This constituted towards a two-day 185 pip advance for the cable.

 

Chart4

 

September

As recent as last Friday, the cable progressed a further 175 pips. Initially, a rally was caused by the construction output, surpassing expectations. A further boost was provided later, with poor US data further weakening the dollar.

 

Chart5

 

What Future Events to Potentially Trade On

UK Jobless Claims:

  • Released on the second Wednesday of every month. For the previous 10 months, jobless claims in the UK have decreased. Bearing in mind growth in services, jobless claims will continue to decrease throughout winter.

Manufacturing PMIs:

  • Manufacturing PMIs are generally released on the first Tuesday of every month. The latest reading showed substantial growth, with a third of the companies surveyed expecting output to be raised over the next three months. This will have a positive correlation on the UK unemployment rate.

BoE Minutes:

  • The Bank of England usually meets throughout the month, specifically one or two days after the UK jobless claims are released. The BoE’s consensus of the UK economy is improving and this should prove bullish for the cable.

Where the United States Economic Inconsistency Can Help:

Non-Farm Payrolls (NFP):

Non-farm payrolls are released on the first Friday of every month, and indicate how many jobs have been added by the US economy. The previous three months have been disappointing. Each time the NFP underperforms, the expectance of the US Federal Reserve exiting QE diminishes. This devalues the dollar, and significantly improves the cable.

US Initial Jobless Claims:

This data is released every Thursday and can be used as a weekly trading opportunity. The general expectance is for 330,000 claims per week, but recently they have been unpredictable. Once again, negative readings reflect positively on the GBPUSD.

Consumer Confidence Sentiment:

Each and every bit of news that comes from the US is consistently under strong scrutiny. This can have an adverse effect on consumer confidence. The US economy is heavily driven by consumer spending. Any negative publicity can have a knock-on effect, affecting employment from small businesses, retail & auto sales, as well as home sales, amongst other variables.

If consumer confidence depreciates, the Federal Reserve will continue the delay on exiting QE. The subsequent weakening of the dollar provides more opportunities for the cable to inflate.

Overall, for those who prefer not to rely on technical analysis, the importance of economic events must not be overlooked. Afterall, the cable appreciated yet another 220 pips on Wednesday 18th September, after the Federal Reserve decided not to begin their QE exit stimulus. Initial indications are pointing towards the consensus that the Federal Reserve will not begin tapering QE in 2013. This will continually weaken the dollar.

The good news is that it is still not too late to go long on the cable.   

Written by Jameel Ahmad, Research Analyst at Blackwell Global.
Follow Jameel on Twitter @JameelAhmadFX


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