Pound Sterling Shaken by Halifax House Price Data Shock

© Kevin Penhallow, Adobe Stock

The Pound has dipped against the Dollar and Euro on Tuesday, May 8 and we are told the decline might be in response to the release of unexpectedly poor UK housing data

The Halifax House Price Index was updated at 08:30 and it revealed prices were down a sizeable 3.1% in April; economists had forecast a mere 0.3% decline.

The annualised figure shows growth at 2.2%, below the 3.3% forecast by economists.

Typically house price data is considered second-tier by markets, but it would appear this month's sizeable decline is not going unnoticed.

"UK house price data is very important for Sterling," says Neil Jones, a dealer with Mizuho Bank Ltd in London. "A very high percentage of UK household balance sheets sit within the retail main residence."

The Pound-Euro exchange rate is quoted at 1.1361 at the time of writing having been as high as 1.1392 earlier in the day. The Pound-Dollar exchange rate is quoted at at 1.3513 having been as high as 1.3592. We do also observe that the Dollar appears to be in the driving seat today, taking a nice chunk out of the Euro.

"The Halifax data is sending off alarm bells this morning. A shocking figure likely to weigh on thinking ranging from the Bank of England to consumer confidence & push the Pound lower in turn," adds Jones.

However, we do caution that there is a danger in focussing exclusively on the monthly number.

Halifax reports house prices in the three months to April were 0.1% lower than the previous three months. Both the quarterly and annual rates have fallen since reaching a recent peak last autumn, with these measures providing a more stable indication of the underlying trend than the monthly change.

Halifax's Managing Director, Russell Galley says housing demand has softened in the early months of 2018, with both mortgage approvals and completed home sales edging down.

"Halifax's measure of UK house prices is all over the place on a month-to-month basis. Best to focus on 3m/3m% growth, which is continuing to hover about zero. Weak, but not the spiral of doom that some headlines will surely imply," says Samuel Tombs, an economist with Pantheon Macroeconomics.

The data comes just two days ahead of the Bank of England's May policy meeting where the Monetary Policy Committee will reflect on the recent run of softer-than-anticipated economic data.

Economists are expecting no change to the basic interest rate, but what matters for Sterling is the guidance the MPC offer on future rate rises.

The slowdown in house prices could prompt the Bank of England to err on the side of caution and signal that consumers need not fear a rise in borrowing costs for the foreseeable future by suggesting no interest rates are imminent.

This will however certainly hurt Sterling which had appreciated into April on the assumption the Bank will be raising interest rate 0.25% in May.

"The Pound will continue to sell off as the expectation shifts to no cut this year with a further sell off on a shift to a cut following a no deal hard-brexit after March 2019," says Jones.

However, other foreign exchange strategists are striking a more constructive note on Sterling ahead of Thursday's event with Nomura saying they reckon the Pound will find the BoE narrative more supportive than markets are expecting. Full coverage of this story can be found here.

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