GBP/USD: Trading the Advance 3Q U.K. GDP Report

Trading the News: U.K. GDP

What’s Expected:

Time of release: 11/01/20119:30 GMT, 5:30 EST

Primary Pair Impact: GBPUSD

Expected: 0.3%

Previous: 0.1%

DailyFX Forecast: 0.1% to 0.5%

Why Is This Event Important:

The advanced GDP report is expected to show the U.K. economy expanding 0.3% in the third quarter, and a positive growth print should spark a bullish reaction in the British Pound as it limits the risk of seeing a double-dip recession. As the fundamental outlook improves, we may see the Bank of England soften its dovish tone for monetary policy, and the central bank may see scope to start normalizing monetary policy in the following year as the recovery gradually gathers pace. However, as the BoE sees a risk of undershooting the 2% target for inflation, the MPC may look to carry its easing cycle into the following year, and the committee may show an increased willingness to expand its asset purchase program beyond GBP 275B in an effort to encourage a sustainable recovery.

Recent Economic Developments

The Upside

The Downside

The rise in private sector spending paired with the expansion in consumer credit should bode well for the U.K., and an above-forecast GDP may lead the GBP/USD to make a run at the 23.6% Fibonacci retracement from the 2009 low to high around 1.6200-20 as the fundamental outlook for Britain improves. However, heightening price pressures paired with the ongoing weakness in the labor market may drag on the growth rate, and a dismal GDP report is likely to spark a bearish reaction in the sterling as the BoE maintains a cautious outlook for the region. In turn, the pullback from 1.6165 may gather pace over the next 24-hours of trading, and the pound-dollar may give back the advance from the previous week as market participants see the MPC taking additional steps to stimulate the ailing economy.

Potential Price Targets For The Release

How To Trade This Event Risk

Expectations for a faster rate of growth encourage a bullish outlook for the sterling, and a positive GDP print could pave the way for a long British Pound trade as the fundamental outlook for the U.K. improves. Therefore, if the economy expands 0.3% or greater in the third-quarter, we will need to see a green, five-minute candle following the report to generate 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 from the entry, and this risk will establish our first target. The second objective will be based on discretion, and we will move the stop on the second lot to breakeven once the first trade reaches its mark in an effort to preserve our profits.

On the other hand, the stickiness in price growth paired with the protracted recovery in the labor market may lead to a soft growth report, and a dismal GDP figure is likely to weigh on the exchange rate as market participants see the BoE easing monetary policy further over the coming months. As a result, if the economy grows less than 0.3%, we will carry out the same strategy for a short pound-dollar trade as the long position mentioned above, just in the opposite direction.

Impact that the U.K. GDP report has had on GBP during the last quarter

2Q 2011 Advanced U.K. GDP

Economic activity in the U.K. increased 0.2% in the second quarter after expanding 0.4% during the first three-months of 2011, but the slowing recovery in Britain may lead the Bank of England to expand monetary policy further as the region faces a growing risk of a double-dip recession. The breakdown of the report showed a 0.5% rise in service-based activity, which was followed by a 0.5% advance in construction, while manufacturing slipped 0.3% after expanding 0.7% during the first-quarter. As the government takes extraordinary steps to balance the budget deficit, there could be increased pressure on the BoE to shore up the ailing economy, and the central bank may extend its easing cycle as the slowdown in economic activity dampens the outlook for inflation. Despite the in-line print, the British Pound traded higher following the growth report, with the GBP/USD pushing back above 1.6400, and the sterling held its ground throughout the day as the exchange rate closed at 1.6406.

--- Written by David Song, Currency Analyst

To contact David, e-mail dsong@dailyfx.com. Follow me on Twitter at @DavidJSong

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