Pound Strengthens on Surge in UK Mortgage Approvals in June

Pound Strengthens on Surge in UK Mortgage Approvals in June
July 30, 2020

 

The pound gained against the greenback yesterday after the Bank of England reported better-than-anticipated mortgage approvals and net lending data for June. Notably, all the economic data from the US, namely goods trade balance, preliminary wholesale inventories, and pending home sales, were better than anticipated by economists. Still, the greenback was unable to gain or even hold ground against the pound because of a sharp decline in crude oil inventories. Generally, the crude oil price is inversely correlated with the US dollar.

Therefore, a decline in inventories propelled the price of crude oil and sparked the US dollar sell-off. Additionally, the US Fed’s decision to extend the lending program until the end of this year, while maintaining a loose monetary policy, is also having a negative impact on the greenback.

The Bank of England reported that the M4 money supply rose by 1% in June, following a 2.1% increase in the earlier month, missing economists’ estimates for a 2.2% growth. M4 money refers to the change in the total quantity of local currency in circulation and deposited in banks.

The UK’s central bank also stated that mortgage approvals increased to 40,000 in June, compared with a mere 9,000 in the earlier month and higher than economists’ anticipation for 35,000 approvals. However, it is still far below the pre-pandemic February level of 73,700.

Likewise, net lending to individuals increased £1.80 billion m-o-m in June, following a decrease of £3.30 billion in the earlier period. Economists had anticipated the net lending to decline by £0.40 billion. Households paid back £86 million of credit in June, following average monthly repayments of roughly £5 billion since March. In April and May, households repaid £7.3 billion and £3.3 billion respectively.

The UK businesses and households increased their sterling holdings by £16 billion in June. Nevertheless, it was far lower than the £53 billion increase in the March-May period. Almost £175 billion has been deposited in banks since March. In the year to February, roughly £98.30 billion has been deposited, translating to an average of about £8 billion per month.

Interest rates on deposits declined further, with rates on time deposits falling by 14 basis points to 0.73%. In June, enterprises got £10.70 billion in funding, mostly from financial markets. Interestingly, SMEs borrowed £10.20 billion, while large enterprises paid back loans.

In the US, Census Bureau reported that goods trade deficit narrowed to $70.60 billion in June, from $75.30 billion in May, and better than the $75.50 billion deficit anticipated by economists. The country exported goods worth $102.60 billion in June, an increase of $12.50 billion from May. Likewise, imports stood at $173.20 billion, up $7.90 billion from May.

The statistical organization also stated that wholesale inventories declined 2% in June, following a 1.2% decrease in the prior month. The market had anticipated wholesale inventories to decline by a mere 0.4%. In value terms, the value of wholesale inventories at the end of June was $629.60 billion. On a y-o-y basis, wholesale inventories fell by 6.1%.

Similarly, retail inventories decreased 2.6% m-o-m to $588.20 billion in June. On a y-o-y basis, retail inventories have fallen by 11.5% from June 2019.

As per the US National Association of Realtors, pending home sales grew 16.6% in June, following a 44.3% increase in the earlier month and surpassed the Consensus estimate of 15.6% increase. Pending home sales refers to a change in the number of homes under agreement to be sold but still awaiting final transaction.

Correspondingly, Pending Home Sales Index (PHSI) increased to 116.10 in June. On a y-o-y basis, contract signings increased 6.3%. The PHSI reading of 100 indicates the contract activity in 2001.

Commenting on the reading, Lawrence Yun, NAR’s chief economist, said, “It is quite surprising and remarkable that, in the midst of a global pandemic, contract activity for home purchases is higher compared to one year ago. Consumers are taking advantage of record-low mortgage rates resulting from the Federal Reserve’s maximum liquidity monetary policy.”

For the entire 2020, existing home sales are anticipated to decrease by only 3%, with sales surging to 5.60 million in 4Q 2020. New home sales are forecast to increase by 3%.

Yun believes that a GDP growth rate of 4% next year will provide the necessary momentum to existing and new home sales, which is predicted to increase by 7% and 16%, respectively. Mortgage rates are expected to remain at roughly 3% over the next one-and-a-half years.

According to the Energy Information Administration, US crude inventories decreased 10.60 million barrels in the week ended July 24th. In the previous week, crude inventories rose by 4.90 million barrels. Analysts had anticipated crude inventories to increase by 1 million barrels. The US crude inventories stood at 526 million barrels, up 17% from a five-year average for this period. Following the news, WTI crude rose 1.05% to trade at $41.47 per barrel. Likewise, Brent gained 1.2% to trade at $43.70 per barrel.

The upbeat mortgage approval data from the UK is expected to keep the GBP/USD pair range-bound with slight bullish bias in the near-term.

The historical price chart indicates that the GBP/USD pair is rising after testing the support level of 1.2468. The next major resistance is anticipated only near 1.3185. The currency pair is trading above its 50-day moving average, while the stochastic oscillator is in the bullish zone. Therefore, we are anticipating the GBP/USD pair to rally further in the days ahead.

GBP - technical analysis - 30th July 2020

Disclaimer: Any financial trading analysis offered here is our opinion and is not intended as advice or direction for investors. We cannot guarantee the success of any trades made as a consequence of this article, and we encourage traders to incorporate a strong money management strategy to limit losses when they enter the markets. Please use this article as part of your own research before formulating strategies prior to trading.

Sammy

Sammy

Sammy is our forex expert, with over 20 years experience in the financial sector, she will be keeping you up to date with the ups and downs of currencies around the world


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