Monday May 26 the week starts with UK Nationwide House Prices (year on year to May). Mortgage data is used to give a current level of prices. This is a useful gauge for traders to determine the costs of homes in the UK and the state of the housing market, which in turn can also give us a clue to some important macro economic factors, such as the rate of inflation and unemployment. There’s a positive correlation between the health of the housing market and employment. The rationale, being that higher prices, in keeping with the laws of supply and demand, acts as a signal to constructors to increase their activities. Bearing in mind that construction is labor intensive we can then deduce that a buoyant housing market could also have a positive impact on employment. Moreover, if construction is incentivized, through higher housing prices this could also increase the demand for building materials, bricks, cement, copper(electric wiring), steal, wood, ceramics, piping etc.
However, because there is a time lag, between the demand for dwellings and the time it takes for constructors to build them, if supply doesn’t respond quickly enough to the buoyant demand for properties this could also exert pressure on housing prices. Indeed, there are some concerns from the Bank of England that the availability of relatively cheap
credit and the Government’s help to buy scheme may be creating another housing bubble.
So if UK housing prices come in at above expectations, we may start seeing a new trend in UK interest rate rises, which could be implemented by the Bank of England with the intended goal of cooling the property market. The extent to which these potential rate rises could occur would most likely depend on the strength of the UK’s economic recovery in the coming months ahead.
Assuming the figure comes in high and the Bank of England decides to raise interest rates, the impact on the FOREX market would be fairly predictable; hot money would flood into sterling, in search of higher rates of return. In short, this could lead to an appreciation in UK sterling, as traders sell other denominated currencies, such as Euros, dollars, yen and then buy sterling. Equally, foreign currencies that have been exchanged for sterling could also depreciate. However, the extent to which we see these movements in the FOREX market depends on whether the market has already anticipated higher than expected UK housing prices and the corresponding interest rate rise that could ensue. A sterling Vs dollar chart showing resistance and support levels could be useful in determining whether potential interest rate hikes have already been factored into sterling’s price.
Onto the euro land, Germany retail sales is out on Tuesday (month on month figure), May 27. This data measures the monthly changes of sales in the German retail sector. From the data we can determine the state of the German consumer. It’s also a good indicator to estimate changes in German GDP, bearing in mind that consumption makes up a large proportion of German growth. High retail sales may spur on consumption and economic growth. Since Germany is the main player in the euro zone, German figures could have some impact on the market. The headline figure is expressed in percentage change in the value of sales. If the figure is positive it would be an indication that economy is ticking over nicely, which could result in a corresponding appreciation in the euro and an equal depreciation in other
currencies. But it is worth noting that German retail sales decreased 0.7% m/m in March. This trend may continue bearing in mind that there are some pressures on real wages.
Swiss Gross Domestic Product (GDP) measurement year on year figure is also out on Tuesday. GDP is the value of all final goods and services produced within the nation's borders. However, this figure is unlikely to be a big mover on the Forex market.
US Durable goods data will also be published on Tuesday, which is a relatively market sensitive data. Durable goods are those expected to last for more than three years for example, cars, televisions, white goods and they usually require large investments or financing. An increase in durable goods data is interpreted as an increase in optimism in the economy. A positive durable goods data from the US could provide tail winds for the dollar.
On Wednesday May 28 German Unemployment figures and euro zone confidence data will be released. The euro zone confidence data is an overall gauge of sentiment toward the economy in the Euro-zone. The index is a composite of most of the sector specific surveys done by the European Commission. A high or rising level of Economic Confidence indicates healthy levels of purchasing, business spending, and investment. An upbeat economic outlook indicates a strengthening of the economy and with that the Euro.
On Thursday May 29, traders will be eagerly waiting for the second estimate, based on more complete data, for the first quarter US GDP figures . GDP from across the pond have a high impact on the financial markets. Positive GDP figures could propel the dollar against a basket of other foreign currencies. Uk consumer confidence index will also be released on Thursday.
Finally, the week closes, Friday May 30 with US Michigan Confidence for May. This relates to US consumer confidence regarding personal finances, business conditions and purchasing power based on hundreds of telephone surveys conducted by the University of Michigan.
There could also be unforeseen future events that may influence the forex market in any given week, natural disasters, geo-political events, terrorist attacks etc. These black swan events are virtually impossible to predict. The aim for the trader is to engineer a maximum tolerance to risk in his trades, to use a combination of tools to assess whether the market sensitive event has already been factored into the currency. Moreover, to use his training/experience and tools to determine buy and sell signals. For those top at this game the rewards are huge.
Darren Winters
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