Marijana No Comments

British Pound Still too Risky to Buy, Downside Risks vs. Euro and Dollar Still Evident

An analyst at Swiss investment bank UBS suggests investors limit their allocation to UK assets – Pound Sterling included – until the current uncertainty around Brexit clears.

If the suggestion is heeded by investors, Pound Sterling could be in for a slow summer as professionals remain on the sidelines until the official exit day nears in October.

“Literally 100% of the conversations I have had with our clients, especially those based outside of the UK, have been about whether it is time to get back in, back into UK property, stocks and Sterling. But we just need the uncertainty to clear,” says Geoffrey Yu of UBS Wealth Management’s UK Investment Office.

The call by Yu comes as Sterling, like the broader currency market, enters a period of depressed volatility, with the Pound-to-Euro exchange rate seen hovering in the 1.15s and the Pound-to-Dollar exchange rate maintaining a small range around 1.30.

Evidence of the market’s desire to steer clear of Sterling is also apparent in positioning data that shows the market is now neutral after bets against the currency were steadily closed out over recent weeks.

In short, taking a directional bet on the currency is proving a hard ask for uncertain currency traders at present.

Analysts at UBS maintain “a long-term bearish Sterling bias”, noting it is 10% overvalued according to one of their preferred models used to gauge a currency’s valuation.

The suggestion that investors avoid Sterling and other UK assets comes despite strong wage data being released last week which some analysts had taken as a sign the Bank of England (BoE) might be tempted to raise interest rates sooner than previously expected. Typically steadily improving data – particularly wage data and inflation – plays positive for a currency as they signal the need for higher interest rates at that currency’s central bank.

As a rule-of-thumb, currencies tend to rise when central banks raise interest rates, and fall back when they cut.

Many economists however see policymakers leaving interest rates unchanged until the Brexit fog clears.

“Given the current uncertainty around the ‘B-word’ I think the BoE will probably remains on hold,” says Yu in an interview with Bloomberg News.

UK wages raced higher by 3.4%, and 3.5% including bonuses, in March but economists says this does not provide enough cause to expect the BoE to immediately ponder raising interest rates in the current political environment. “The UK labour market remains very tight which should be reflected in a further pick-up in wage growth,” says Elsa Lignos, a foreign exchange strategist with RBC Capital Markets. “The problem is that it cannot translate into expectations of BoE hikes while Brexit uncertainty persists, and so it is hard to make it a positive GBP story.”

Some economists have even suggested the strong wage growth is in fact another symptom of Brexit uncertainty with businesses opting to invest in staff instead of investing in more expensive new equipment. “In a period of acute uncertainty over Brexit, firms chose to invest in people – who remain relatively cheap – rather than make long-term bets on expensive capital, such as new premises, machinery or software,” says Mike Jakeman, senior economist with PwC.

The BoE will therefore arguably be quite content to allow a ‘nice buffer’ of real earnings to exist between inflation and income growth. This will allow the “BoE to probably focus on other things,” says Yu.

Indeed, Sterling barely reacted to the release of strong labour market data on April 16, suggesting the market wants to see a substantial move for the better in UK data before it bids Sterling.

What would have driven the Pound in the past simply doesn’t have the same clout in 2019.

Concerning the Pound’s outlook, UBS are forecasting a lower Sterling against the Euro over coming months with the Pound-to-Euro exchange rate forecast to trade at 1.1236 by year-end.

The Pound-to-Dollar exchange rate is however forecast to trade at 1.35, reflecting a broadly softer Dollar environment.

“Risks of a ‘no deal Brexit’ have subsided and Eurozone political tensions appear contained. We are however still cautious on the GBP as continued uncertainty weighs on the macro outlook and prevents a more meaningful Sterling recovery,” says Vassili Serebriakov, a strategist with UBS.

A Stronger Pound Ahead say Citi Eyeing an August Interest Rate Rise

Once Brexit is resolved, and assuming not by a hard-Brexit, the Pound is at risk of a strong appreciation since UK assets are a ‘buy’ candidate on the basis of raw economic fundamentals.

Analysts at Citibank, the largest foreign exchange dealer in the world, are a little more optimistic and have shifted from a ‘wait-and-see’ on interest rates to envisaging the possibility of a rate hike in one of the five remaining Bank of England meetings this year.

Citi analysts see domestic inflationary pressures rising in the UK, citing strong wage growth driving up prices.

“There are 5 BoE meetings left in 2019. The fresh Brexit extension (to October 31) allows for some breathing space and if UK data holds up, the August meeting might then become more ‘live’ than markets anticipate,” say Citi in a recent client briefing. “A grab-and-go BoE rate hike may be possible in August.”

Pessimistic global growth forecasts had been a major headwind to the outlook for the UK economy but these too have eased since the release of better-than-expected data from China out last week, which showed GDP, retail sales and trade data, all rising strongly, and helped negate hard-landing concerns for the world’s second-largest economy.

The BoE cited the global growth slowdown as a temporary negative factor for the UK economy in its February policy statement.

“Global growth is expected to dip below trend in coming quarters, weighing on UK net trade, before rising to around potential rates. Activity is projected to be supported by the more accommodative monetary policies in all major economic areas that markets now expect,” says the February policy statement from the Bank of England.

If these concerns ease, therefore, the Bank might raise their forecasts.

An improved outlook for global trade as a result of positive reports from negotiations between the U.S. and China has further supported the outlook for global growth, the UK included.

These exogenous factors are likely to support the outlook for Sterling and possibly raise the chances of an earlier BOE rate hike than previously expected.

Currently, the market is discounting only one 25bp hike over the next 3 years, “and will likely look for signals at the May board meeting where the majority of members will probably reject a rate hike, but could send “hawkish” forecasts and a dissenting vote (as a signal for a possible August hike,” say Citi.

Therefore, the view that the market is under-appreciating a rate rise at the Bank of England is a bullish one for Sterling, if proven correct.

Citi are forecasting the Pound-to-Euro exchange rate to trade higher at 1.1765 in three months, and 1.16 in six to twelve months.

They are forecasting the Pound-to-Dollar exchanage rate to trade higher at 1.34 in three months, and 1.37 in six to twelve months.

Source: Pound Sterling Live

Marijana No Comments

Pound to euro forecast after Brexit extension agreed last night

The pound to euro exchange rate has fallen marginally lower after last night’s Brexit developments over in Brussels. The UK has been granted a further Brexit extension until 31st October to withdraw from the European Union. The markets will now adjust to this news as they now try to predict the most likely outcome of Brexit. The extension does have flexibility and can be terminated at any time should the withdrawal agreement be voted through in the House of Commons which does leave options open.

What next for Theresa May?

The Prime Minster is still pushing for her deal, potentially with the support of the Labour party with a potential customs union. It does seem difficult to see a way forward considering how unpopular the deal has been to date. More importantly the Conservative Party appears to be turning on the Prime Minister following this extension last night and if a vote of no confidence was held then the numbers would likely be there for her to go. Pressure is likely to build for her to resign in the very near future and see a new Prime Minister take over with new direction.

All of this bodes badly for GBP to EUR with such an uncertain outlook for the British economy and in British politics. Reports have emerged that although there was a vote of confidence in the Prime Minister quite recently another one could be held if party members filed a petition reaching 10,000. Considerable volatility for GBP vs EUR is to be expected in these coming days.

Some commentators have suggested that an extension beyond this date may even be required adding another layer of uncertainty for the United Kingdom and hence the pound. The extension is unlikely to help the price of sterling as it is approaching nearly three years since Britain voted to leave the European Union and this uncertainty for Britain’s future is unhelpful for the British economy.

Whilst the UK economy has held up reasonably well following the referendum, after such a long period of uncertainty it is inevitable the economy will start to feel a negative impact if it hasn’t already. With a global slowdown approaching with one heading for the US in particular it may only be a matter of time before the UK too sees a downturn which would prove negative for sterling exchange rates.
By James Lovick

Source: Pond Sterling Forecast

Marijana No Comments

Pound-to-Euro Rate Forecast for the Week Ahead

Pound Sterling peaked at 1.1525 against the Euro last week after a combination of easing Brexit fears and continued expectations that the Bank of England (BOE) will raise interest rates drove the UK currency higher.

GBP/EUR rose up to the top of its long-term range but then lost momentum and fell back down to the 1.1430/40s, where it spent most of Friday plateauing.

Our analysis of the technical structure of this market shows the sell-off was prevented from going lower by the R1 monthly pivot at 1.1430, which has put a firm floor under the Pound which could underpin the currency over coming days.

Pivots are price levels used by professional traders to gauge the trend and as entry points for buy and sell orders; they therefore are likely to have an influence on future market direction.

When a falling currency touches a pivot it can often bounce back up.

The effect is exacervated by short-term technical traders betting on the bounce and thus adding to the buying pressure.

It is not surprising therefore that the exchange found extra support at the pivot and it is possible this could be a platform for a reversal and the pair to start going higher again.

This is our base case scenario since the short-term trend is still bullish.

In our last forecast we also talked about how the pair was now trading in between the 10 and 20 period moving averages (MAs) on the four hour chart, which was traditionally considered a ‘buy zone’, which means an optimum level to buy the asset and join the dominant uptrend (in expectation of higher prices).

We further noted that we were on the lookout for a bullish reversal candle to form inside the buy zone to provide confirmation of a resumption of the uptrend.

Although we did get a long green bullish candle developing in the buy zone, a ‘bullish engulfing’ candle pattern (circled above), it was followed by weakness and due to lack of follow-through, we consider it not a very reliable signal.

If another more reliable bullish candlestick were to form at the current level and in the buy zone between the 10 and 20 MAs, such as one of those featured in the illustrations below then we could forecast a move up to a target at the 1.1525 first, followed by the 1.1550 range highs/upper channel line.

The range highs will continue to present an obstacle to higher prices as it forms the upper limit of a band that has been in place for six months now (see pic below).

The ceiling of the range, therefore, will probably reject the exchange rate as it has done on multiple occasions in the past (circled in red above).

Nevertheless, there is also a possibility the pair could break out of the range altogether, but, for confirmation, we would ideally need to see a break clearly above the range highs.

Another monthly pivot, the R2, is situated just above the range highs at 1.1581, and it is likely to be a further obstacle to the uptrend.

Therefore, we would ideally like to see a break above 1.1620, for confirmation of a clearance of R2 and the start of an extension up to the next target at 1.1770.

This is the minimum price objective calculated using the traditional technical method of taking the golden ratio (0.618) of the height of the range and extrapolating it higher from the break.

On balance, we see a greater overall chance of an upside breakout of the range eventually, rather than a downside breakout, for reasons outlined in our previous article on the pair here.

Data and Events to Watch for the Pound in the Week Ahead

Overall it is a relatively quiet week for the Pound on the calendar and the most likely source of volatility will probably be the ongoing Brexit debate.

The Pound strengthened last week after a transitional agreement was agreed by the EU in Brussels, which will now see the UK extend its stay by 21 months after the March 2019 deadline, on special terms, whilst a comprehensive trade deal is hammered out.

Brexit headlines are of course impossible to predict as they are generated by politicians and we will be monitoring the newswires for any potential points of interest.

From a purely hard data perspective, the main release is the third estimate of Q4 GDP on Thursday at 8.30 GMT, although the consensus sees little chance of a change from the second estimate of 0.4% growth quarter-on-quarter.

“The more significant interest for next week’s publication will come from the national accounts detail released at this time,” says Investec of the GDP release. This will include revisions to data on household income and personal finances in general, which affect overall consumer spending, the biggest driver of growth for the economy.

Should growth be downgraded unexpectedly we would certainly expect a soggy end to the shortened week for the Pound.

Current account data for Q4 is also out on Thursday, March 29, at 09.30, and is forecast to show the deficit widening to -24.0bn from -22.8bn previously.

Traditionally the current account was always seen as a major influence on currency levels but now there appears to be little empirical evidence of a link, so we do not see much volatility arising from this release.

The CBI Distributive Trade Survey for March is out on Wednesday, Mach 28 at 10.00 GMT and will provide the latest data on the retail sector.

“Launched in 1983, this widely followed survey covers questions on sales, orders, stocks, general business situation, employment trends and internet sales,” says the CBI website.

Other March data includes Gfk Consumer Confidence, which forecasts to remain at a -10 reading the same as February.

Investec, however, sees a chance of a lift to -8 in March because of rising wages, less job uncertainty, easing inflation, the agreement of a Brexit transition deal and “the uncharacteristically “Tiggerish” Chancellor at his inaugural Spring Statement.

Other data in the week ahead includes mortgage approvals on Monday at 8.30, Nationwide house prices on Thursday at 6.00 (watch for a negative result as this would make two negative months in a row and be bearish for Sterling); business investment on Thursday at 8.30, consumer credit at the same time and mortgage lending also at the same time.

Data and Events to Watch for the Euro in the Week Ahead

The Euro showed vulnerability last week after manufacturing and services data for March showed a continued slowdown and it is against this backdrop of slowing growth than the currency will be assessed in the coming week.

The next major set of releases for the Euro is inflation out the week after next, with only Germany inflation out in the week ahead, on Thursday at 13.00 GMT.

German inflation is not expected to be representative of inflation dynamics in the rest of the Eurozone, however, so it may have limited impact, according to analysts at Nordea Bank.

“We caution against reading too much into German inflation figures out next Thursday as the Easter effect could distort the picture – this month to the upside,” says Martin Enlund at Nordea Markets.

Eurozone loan growth and money supply for February, meanwhile, are out on Tuesday, March 27, at 9.00. The former is forecast to rise by 3.0% from 2.9% in January and the later to remain at 4.6% – the same as the previous month.

Loan growth and money supply are important for the Euro as the indicate credit dynamics and more take up or availability of credit is usually a positive sign for the economy, and therefore the Euro.

A whole load of sentiment indicators is scheduled for release at 10.00 on Tuesday, including the final estimate for consumer confidence in March, industrial, services and economic sentiment in March and business confidence also for March.

Source: Pound Sterling Live

Marijana No Comments

Pound Sterling Set for a Steep Fall Vs Euro in 2018 Say Lloyds Banking Group

Brexit and monetary policy on both sides of the English Channel will be key drivers of the Pound and Euro next year.

The Pound-to-Euro rate could be set for a steep fall in 2018, according to strategists at Lloyds Banking Group, who warn of considerable uncertainty that will surround the exchange rate in the year ahead.

Brexit and monetary policy on both sides of the English Channel will be key drivers of the Pound and Euro next year, with acrimony in Brexit negotiations and slow economic growth in the UK being enough to keep the Bank of England on hold. European Central Bankpolicy will be important too.

“Comments from Brexit Secretary David Davis and EU Chief Negotiator Michel Barnier have reinforced the challenges both sides face in coming to a comprehensive agreement,” says Gajan Mahadevan, a quantitative strategist at Lloyds Banking Group.

Fears over the path of Brexit negotiations eased in December when the European Council voted to allow EU negotiators to begin talking about trade and transition. This was after an agreement was struck covering a “divorce bill”, the safeguarding of citizens rights after the UK leaves and the Northern Irish border.

“Davis has suggested that the UK is aiming for a ‘Canada plus plus’ deal, adding that the intention through negotiations is to treat goods and services as ‘inseparable’. However, Barnier has already outlined that there will be no ‘special’ treatment for the UK financial services sector,” Mahadevan adds.

New guidelines for EU negotiators in the second phase of talks have also highlighted scope for more deadlock between the two sides during the months ahead.

Brussels wants the withdrawal commitments to be made legally binding before the UK’s exit in 2019, but to leave the bulk of trade discussions until after March 2019.

Prime Minister Theresa May and David Davis have insisted that “nothing is agreed until everything is agreed” and that the withdrawal commitments cannot be firmed up without a wider agreement.

“Some activity indicators suggest Q4 GDP growth may be slightly softer than Q3, and the health of the UK consumer is being carefully watched. With interest rate markets are not fully ‘pricing in’ a hike until Q1 2019, uncertainty shrouds the Bank rate outlook,” Mahadevan adds

The Bank of England raised interest rates by 25 basis points, to 0.50%, in November but markets are divided over how soon another hike can be expected. Interest rate markets currently suggest it will be 2019 before the BoE moves again.

Any change in this stance will either pressure or boost Sterling as bond yields and interest rate derivatives prices rise or fall in response to new developments.

“We anticipate the next hike in UK Bank rate to be in August 2018. In contrast, we see the European Central Bank (ECB) leaving interest rates unchanged next year, although it is likely to wind down its asset purchase programme,” says Mahadevan.

The European Central Bank is widely expected to wind down its quantitative easing program in 2018, which currently sees it buy €60 billion of European bonds each month in an effort to keep interest rates low and spur economic activity.

This could place upward pressure on the Euro again in 2018 although there are risks to the outlook for the common currency too, notably around the Italian election that is set to take place in the first quarter.

“Balancing all factors, we see GBP/EUR limited to a range, forecasting 1.09 for both end-2018 and end-2019,” says Mahadevan.

The fall to 1.09 in the Pound-to-Euro rate that is pencilled in by Mahadevan’s forecast implies losses of some 3.5% next year, which is broadly similar to the loss seen by the exchange rate in 2017.

“However, given the high degree of uncertainty around key drivers, there are significant risks to our profile in both directions. Unsurprisingly, this is evident in market sentiment – analysts’ forecasts for GBP/EUR range from 1.04 to 1.25, a range of just over 20%,” Mahadevan warns.

The Pound was quoted 0.04% lower at 1.1251 against the Euro during early trading Thursday.

Source: Pound Sterling Live

Marijana No Comments

British Pound Vs Euro Has Strategists Divided As The Bank of England Looms

November’s interest rate decision is fast approaching and, with recent data having shown the UK economy at risk of a slowdown, strategists are increasingly divided over what to expect from the Bank of England.

Those hoping for a retreat from earlier warnings over UK interest rates may be left disappointed in the wake of the Bank of England’s November monetary policy announcement.

A solid majority expect the Bank of England to hike rates in November while less than half of strategists expect it to follow through with further policy action in the months after.

“There is an argument doing the rounds that the UK is raising rates so that they can cut them when the ‘inevitable’ Brexit-related collapse happens. Maybe,” says Ben Powell CFA, a multi-asset class content salesperson at Swiss bank UBS.

The bulk of those who do not subscribe to the Brexit collapse view have often cited growing concerns over FX-induced inflation as the motivator behind what is, according to them, likely to be limited policy action.

“At 4.5% UK unemployment is at lows not seen in 5 decades. UK asset prices are booming. In 2016 UK household wealth rose by ~GBP900bn to beyond GBP10Tr for the first time. That ~GBP900bn growth is around 50% of GDP,” says Powell.

But UK economic fundamentals have remained on a sound footing since the Brexit vote in June 2016, despite the prevailing narrative in much of the media and most parts of the financial world.

“UK borrowing has never been cheaper. Outstanding resi mortgages cost 6% 10 years ago and 2.7% now; new lending is at 2.3%. Nearly half of today’s unsecured personal loans cost less than 5%; Sainsbury’s and Tesco’s banking arms are advertising unsecured loans at ~3%, some for up to 10 years in duration,” wrote Jason Napier, an equity research (banks) analyst at UBS.

With the market’s eyes fixed keenly on a deterioration in UK consumer spending that has weighed on economic growth over recent quarters, the “emperor’s well clothed state” has gone unacknowledged by the majority.

“Clearly it’s a matter of judgement, but it may be the case that the Governor thinks supermarkets offering 10 year unsecured loans for ~3% feels a bit punchy. There is also a boom in car financing,” says Powell.

Bank of England governor Mark Carney said in a September speech that UK banks have been extending too much credit to consumers at insufficient rates of interest and that the more “frothy” parts of the market should be addressed.

“This is what the data suggests. And it is what the Governor is telling us he is doing. My sense is that those hoping for a ‘dovish hike’ next week are going to be disappointed,” says Powell.

Pound to Be Left High and Dry Says JPMorgan

The Pound Sterling is at risk of being left high and dry against the Euro and other G10 counterparts over the coming weeks as the interest rate tide that buoyed it through September recedes further.

Bank of England policymakers may not be able to do enough to keep it afloat even if they do vote to hike rates at the November meeting, according to strategists at JPMorgan, who are still betting against the Pound-to-Euro rate.

“Our highest conviction macro trade in recent weeks has been short GBP as we felt that UK rate hikes were overpriced given the weak starting point for UK growth and the existential Brexit shock that continues to dominate the medium-term outlook,” says Daniel Hui, a foreign exchange strategist at JPMorgan.

The foreign exchange team at the US bank say the UK economic backdrop made it difficult enough as it was, in September, to justify embarking on an interest rate hiking cycle but observe that the economy has shown signs of slowing further since then.

“BoE expectations have come under pressure this from a combination of lacklustre growth data releases (annual growth in retails sales is now close to 1% compared to +4% when the BoE eased policy last year) together with a stream of commentary from MPC members that reveals a greater range of opinion about the timing of any monetary tightening,” says Hui, in a note written Friday.

The Pound was buoyed in September when the Bank of England said it begin withdrawing stimulus (hiking rates) over the coming months if inflation strayed further north of its 2% target and the economy remained on a steady footing.

By the end of that month the British currency had posted the strongest performance of all those in the G10 basket as traders rushed to price in a Bank of England hike in November and further action to come in 2018.

“The rate market has belatedly begun to rethink its scenario of a relatively normal rate hike as a result of more equivocal commentary from the BoE and the absence of lift in the growth numbers,” says Hui. “Next week’s 3Q GDP print is expected to confirm the UK as the clear growth laggard within G10, and so maintain the sense of drift in rate expectations and GBP.”

The BoE is expected to raise the bank rate by 25 basis points on November 02 but the number of voices questioning whether this is the right thing to do has grown in recent weeks.

“But it’s important to recognize that a less assertive BoE outlook is not the only factor weighing on GBP, as we interpret GBP’s recent moves as reflecting not only a partial retrenchment of priced hikes, but also the additional leverage of GBP to lack of progress in the Brexit talks and the increased risk of an accidental no deal,” writes Hui.

Hui notes the recent signs of progress in Brexit negotiations but flags that trade and transition talks are unlikely to begin until December at the earliest, the atmosphere around talks may remain uncomfortable for the foreseeable future and risks around sentiment to the Pound will remain high.

The Pound received a boost over the course of Friday and Monday after October’s European Council summit concluded with Brussels sounding a more conciliatory tone on the subject of Brexit negotiations, which revived hopes that “sufficient progress” could soon be made for negotiations to move onto the subjects of trade and transition.

“Our largest net position is long EUR against USD, GBP and CHF. The ECB taper announcement is expected to be marginally constructive for EUR,” says Hui. “But we don’t expect fireworks as the ECB will emphasise dovish forward rate guidance to anchor Bund yields despite what could be a sharp slowdown in the run-rate of asset purchases. EUR upside will be a grind.”

The Pound-to-Euro rate was quoted 0.04% higher against the Euro at 1.1237 during early trading in London Tuesday while Sterling was marked 0.08% higher at 1.3215 against the Dollar.

Source: Pound Sterling Live

Marijana No Comments

Pound Sterling Strengthens Vs Euro and Dollar As EU Summit Wraps Up On a Positive Note

Friday’s boost to the Pound comes closely on the heels of a sluice of bad news for the UK economy, which has recently seen consumer spending fall and the outlook for consumer credit deteriorate further.

The Pound rose strongly throughout the morning session Friday as October’s European Council summit looked set to conclude on a positive note.

Comments from German Chancellor Angela Merkel, Prime Minister Theresa May and a host of other officials were behind the lift, all of which seemed to suggest Brexit negotiations may soon move forward onto the subjects of trade and transition.

“My impression is that these talks are moving forward step by step,” Merkel told reporters. “From my side there are no indications at all that we won’t succeed.”

Markets have feared a possible delay to the progression of talks on to the subject of trade beyond December.

PM May reiterated her Florence promise that the EU will not suffer a budgetary black hole during the current spending period, as a result of Brexit, which runs into 2020.

“There is still some ways to go on Brexit,” says Theresa May. “I am ambitious and positive about the Brexit negotiations.” She also reiterated that the UK will “honour our commitments.”

Any delay of trade or transition talks beyond December is seen as raising the risk of a so called “hard Brexit”, or a “no deal Brexit”, given the time it is likely to take to agree details of a “transition deal” as well as the future relationship.

The PM’s statements on Brexit came closely on the heels of public sector net borrowing data that showed UK government borrowing rising to £5.3 billion in September, up from £5.1 billion the previous month.

Despite a rise in the headline measure, the latest borrowing figure was the lowest of any September month for a decade.

The Pound-to-Euro rate had risen 0.43% to 1.1145 a short time ahead of noon while the Pound-to-Dollar rate added 0.08% to 1.3159, making Sterling the best performer against the greenback out of the G10 basket.

Consumer and Credit Outlook Clouds Further

On Thursday, Office for National Statistics data showed retail sales falling sharply by -0.8% in September, much further than the -0.1% decline pencilled in by forecasters.

Despite this, economists still see consumer spending as having stabilised during the third quarter and are also predicting a steady performance from the economy during the period.

However, with inflation pressures already dampening spending, the outlook for consumers and credit supply to households appeared to darken further on Thursday.

“UK household debt levels are high and still growing,” says Annabel Schaafsma, head of Moody‘s EMEA consumer surveillance team. “As real income declines, UK consumers are vulnerable to an economic downturn and any increases in inflation or interest rates could cause problems for household finances, especially for those on lower incomes.”

Moody’s, the ratings agency, said the faltering outlook for the UK consumer will have an impact on credit providers who support their business using the securitisation market.

“Additionally, consumer credit has been growing in excess of the rate of household income. This suggests we will see a weakening future performance of some UK consumer securitisation deals,” says Schaafsma.

Securitisations are an important source of liquidity for banks of all sizes and also for some corporates. Even mobile phone contracts can be securitized and sold on to investors, unlocking capital and providing an instant return for originators.

However, investor demand for UK securitization deals looks set to weaken, particularly in the mortgage market.

“Moody’s expects higher delinquencies in newer, non-conforming RMBS, as opposed to older, more seasoned deals. The borrowers in newer deals are more likely to be paying higher interest rates and have a smaller safety net. Buy-to-let RMBS is very sensitive to a weaker economy and occupancy rates and rents are expected to decline,” the ratings agency says in a statement.

Bank of England Credit Survey Points To Tighter Supply 

Thursday’s Moody’s report came barely a week after Bank of England data showed default rates on credit cards and other types of unsecured loans rose during the third quarter.

Recent BoE changes to bank capital requirements for different types of consumer loans had been expected to slow the pace of lending to households during the months ahead.

But a rise in default rates over the third quarter looks as if it might accelerate the pace at which banks now cut back lending to consumers.

“Default rates on credit card lending were reported to have increased slightly in Q3, while those on other unsecured lending increased significantly,” the Bank of England says, in its latest quarterly Credit Conditions survey. “Lenders reported that the availability of unsecured credit to households decreased in Q3 and expected a significant decrease in Q4.”

Source: Pound Sterling Live