2007, at £4.2bn for the month, a significant increase from May (£3.8bn) and since June last year (£3.3bn). 6
It is also very useful to read statements from the Bank of England. The following is from its June 2014 Financial Stability Report:
While housing market activity has eased recently, UK house prices have continued to rise and indicators of house price expectations point to continued strength. The share of new mortgages with high loan to income multiples has increased, which could result in more households encountering payment difficulties in the face of shocks to income and interest rates. 7
A careful reader would see some hesitation on raising interest rates, because one impact of raising rates is to reduce price inflation but another impact adversely affects the financial stability of people. It is a balancing act!
But housing fundamentals in Great Britain are red hot and won't go away that easily. Here is what the Financial Stability Report further noted:
More generally, a longer-term gap remains between the growth in demand for housing in the United Kingdom and the rate of house building. The net new supply of private housing in the United Kingdom was 110,000 in 2013 – well below the 2007 average of 180,000. 8
Forex traders who trade the GBPUSD would gain an edge by watching housing data as a clue to whether the GBPUSD is likely to rise in value.
Read the latest Financial Stability Report from the Bank of England (http://www.bankofengland.co.uk/publications/Pages/fsr/2014/fsr35.aspx).
Tracking changes in how an economy is growing is clearly an important part of gaining a sense of whether a currency will be strengthening or weakening. The relationship of growth and currencies applies throughout the world. While there are many aspects to economic growth, the forex trader's main focus should be on interest rates. An increase in interest rates tends to strengthen the currency. Traders need to go further than just knowing what the rate levels are. They need to assess whether the economy is expected to be strengthening or weakening. As a result, the forex trader should keep track of housing data when deciding on the direction of trading a currency, as housing data affect the decision to increase or decrease rates, or keep them the same.
Chapter 2
The Role of Inflation, Reflation, and Deflation
Inflation and its inverse, deflation, are fundamental forces in currency trading. Central banks are always concerned about managing inflation so it doesn't turn too high, into hyperinflation, nor too low, and into a deflation. It's interesting to note that at first blush the fear of deflation seems unreasonable. Isn't lower price a good thing? To a consumer, it would seem so. But to an economy it means there is less growth. Therefore, fear of deflation is a major concern. For central banks, monetary policy is a balancing act.
Containing inflation in the Western World has in many ways been achieved. In the period of 1973 through 1987, inflation levels in industrialized countries were near the 7.5 percent range. A decade later, in 1989, inflation levels ranged at the much lower level of 3 percent. Today, a reversal of expectations has occurred in the world of trading, where inflation growth, partly due to the financial collapse of 2008, is low.9
Central banks around the world monitor inflation and raise interest rates to try to slow down inflation. Central banks often include in their statements accompanying interest rate decisions that they will be vigilant over potential risks of inflation. This is commonly known as being an inflation hawk. Whenever inflation is feared to be lingering in the economy, traders interpret this fear as raising the probability that interest rates will increase.
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