GBP/USD: Trading the Change in U.K. Industrial Production

Trading the News: U.K. Industrial Production

Why Is This Event Important:

Industrial outputs in the U.K. are expected to increase for the third consecutive month in September, and a faster pace of production could spark a bullish reaction in the British Pound as the prospects for future growth improves. As the economic recovery in Britain slowly gathers pace, with inflation holding above the government’s 3% limit for price growth, the Bank of England may preserve its wait-and-see approach throughout the remainder of the year as the economic outlook remains clouded with uncertainties.

What’s Expected:

Time of release:11/09/2010 9:30 GMT, 4:30 EST

Primary Pair Impact :GBPUSD

Expected: 0.4%

Previous: 0.3%

Will This Be Market Moving (Scenarios):

Industrial production in Britain is forecasted to expand another 0.4% in September after rising 0.3% in the previous month, while manufacturing is projected to widen 0.2% following the 0.3% expansion in August. As the region benefits from the rise in global trade, firms may increasing their rate of production throughout the coming months, and the BoE may look to raise its economic assessment as the outlook for growth and inflation improves. However, given the three-way split within the MPC, members of the central bank may struggle to meet on common ground as board member Adam Posen talks down the risks for inflation, and speculation surrounding the outlook for future policy could play an increased role in driving price action for the British Pound as market participants scale back expectations for further easing.

The Upside

A report by the U.K. Office for National Statistics showed economic activity expanded 0.8% in the third-quarter, which exceeded forecasts for a 0.4% rise, and the recovery may gather pace over the coming months as the central bank continues to support the real economy.

As a result, we may see businesses turn increasingly optimistic towards the economy and raise their rate of production going into 2011, which could lead the GBP/USD to maintain its upwards trend over the months ahead as the outlook for growth and inflation improves.

The Downside

However, as businesses in Britain face higher input costs paired with tightening credit conditions, firms may put a lid on production and employment as policy makers maintain a cautious outlook for the region. If production falters throughout the remainder of the year, the downturn in private sector activity could certainly bear down on the recovery, and speculation for further easing may intensify in the days ahead as Mr. Posen petitions to expand QE.

How To Trade This Event Risk

Expectations for a third consecutive monthly rise in business outputs favors a bullish outlook for Cable, and price action following the data could set the stage for a long British Pound trade as growth prospects improve. Therefore, if industrial production expands 0.4% or greater in September, we would need to see a green, five-minute candle following the release to establish a buy entry on two-lots of GBP/USD. Once these conditions are met, we will set the initial stop at the nearby swing low or a reasonable distance, and this risk will generate our first target. The second objective will be based on discretion, and we will shift the stop on the second lot to breakeven once the first trade reaches its mark in an effort to lock-in our profits.

In contrast, uncertainties surrounding the economic outlook paired with the instability in the financial system could encourage firms to scale back on outputs, and a dismal production report could stoke increased selling pressures on the sterling as the prospects for growth and inflation deteriorate. As a result, if industrial outputs hold flat or unexpectedly contract from the previous month, we will look to implement the same setup for a short pound-dollar trade as the long position laid out above, just in reverse.

Potential Price Targets For The Release

Impact the change in U.K. Industrial Production has had on GBP during the last month

August 2010 U.K. Industrial Production

Industrial outputs in the U.K. advanced 0.3% in August, which topped forecasts for a 0.2% expansion, while manufacturing increased 0.3% during the same period amid projections for 0.2% rise. As businesses continue to increase their rate of production, with the region benefitting from the rise in global trade, firms may turn increasingly optimistic towards the economy as the recovery slowly gathers pace. As growth prospects improve, the Bank of England may refrain from easing monetary policy further as inflation continues to hold above the government’s 3% limit for price growth, but members of the MPC may see scope to expand quantitative easing over the coming months as it aims to encourage a sustainable recovery. As a result, there could be an growing split within the MPC as board member Andrew Sentance pushes for a 25bp rate hike while Adam Posen votes to expand QE, and speculation surrounding the outlook for future policy is likely to play an increased role in driving price action for the British Pound as the central bank stands ready to move monetary policy in either direction.

What To Look For Before The Release

Traders with access to market depth information via the FXCM Active Trader Platform may use it to gauge the potency of the economic data release as well as to shed some light on the market’s directional bias. Increasing volume ahead of the announcement will telegraph likely follow-through behind whatever move is to materialize, while an imbalance in available liquidity on the Bid versus the Offer side of the market will tell us the direction major institutions are likely favoring ahead of the announcement:

Bullish Scenario: If we see substantially deeper available liquidity on the Bid side of the market, this tells us that major price providers in the market are looking to buy the GBP against the US Dollar. Considering that close to 60% of all FX market volume is cleared through just six top banks, we see it prudent to be on the same side of the trade as major institutions and will favor a bullish bias on GBPUSD ahead of the data release.

Bearish Scenario: If we see substantially deeper available liquidity on the Offer side of the market, this tells us that major price providers in the market are looking to sell the GBP against the US Dollar. Considering that close to 60% of all FX market volume is cleared through just six top banks, we see it prudent to be on the same side of the trade as major institutions and will favor a bearish bias on GBPUSD ahead of the data release.

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To discuss this report contact David Song, Currency Analyst: dsong@fxcm.com