- 1Q U.K. GDP to Expand Annualized 2.6%- Slowest Pace of Growth Since 3Q 2013.
- Will the Bank of England’s (BoE) Inflation Report (May 13) Highlight a Slower Recovery?
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Trading the News: U.K. Gross Domestic Product (GDP)
The U.K.’s 1Q Gross Domestic Product (GDP) report may dampen the appeal of the British Pound and undermine the near-term rebound in GBP/USD as the growth rate is expected to increase an annualized 2.6% after expanding 3.0% during the last three-months of 2014.
What’s Expected:
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Why Is This Event Important:
Threats of a slower recovery may encourage the Bank of England (BoE) to adopt a more dovish tone while delivering its quarterly inflation report on May 13, and the central bank may look to further delay its normalization cycle in an effort to stem the downside risks surrounding the region.
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Expectations: Bearish Argument/Scenario
| Release | Expected | Actual |
|---|---|---|
| Retail Sales ex Auto (MoM) (MAR) | 0.5% | 0.2% |
| Average Weekly Earnings inc Bonus (3MoY) (FEB) | 1.8% | 1.7% |
| Trade Balance (Pound) (FEB) | -1.5000B | -2.859B |
Weakening demand from home and abroad may pave the way for a marked slowdown in the growth rate, and a dismal GDP print may trigger a near-term topping process in GBP/USD as market participants scale back bets for higher borrowing-costs in the U.K.
Risk: Bullish Argument/Scenario
| Release | Expected | Actual |
|---|---|---|
| Employment Change (3Mo3M) (FEB) | 170K | 248K |
| Manufacturing Production (MoM) (FEB) | 0.4% | 0.4% |
| Purchasing Manager Index- Manufacturing s.a. (MAR) | 54.4 | 54.4 |
Nevertheless, the ongoing improvement in the labor market paired with the rebound in business outputs may generate a positive development, and an unexpected pickup in GDP may spur a larger advance in British Pound as it boosts interest rate expectations.
How To Trade This Event Risk(Video)
Bearish GBP Trade: U.K. GDP Slows to Annualized 2.6% or Lower
- Need red, five-minute candle following the GDP print to consider a short British Pound trade
- If market reaction favors bearish sterling trade, short GBP/USD with two separate position
- Set stop at the near-by swing high/reasonable distance from entry; look for at least 1:1 risk-to-reward
- Move stop to entry on remaining position once initial target is hit, set reasonable limit
Bullish GBP Trade: 1Q Growth Rate Exceeds Market Expectations
- Need green, five-minute candle to favor a long GBP/USD trade
- Implement same setup as the bearish British Pound trade, just in reverse
Potential Price Targets For The Release
GBP/USD Daily Chart
Chart - Created Using FXCM Marketscope 2.0
- Ongoing series of higher highs & lows favors a further advance in GBP/USD; could be at risk for a reversal as the RSI threatens the bearish momentum carried over from July 2014.
- Seeing increased volatility in the DailyFX Speculative Sentiment Index (SSI) going into the end of the month as retail crowd flips back to net-short GBP/USD, with ratio currently holding at -1.25.
- Interim Resistance: 1.5340 (78.6% retracement) to 1.5350 (50% retracement)
- Interim Support: 1.5015 (50% expansion) to 1.5050 (50% retracement)
Read More:
USD/JPY Continues to Carve Lower-Highs Despite Japan Ratings Cut
Price & Time: Sterling Confluence
Impact that the U.K. GDP report has had on GBP during the last release
| Period | Data Released | Estimate | Actual | Pips Change | Pips Change |
|---|---|---|---|---|---|
| 4Q 2014 | 01/27/2014 09:30 GMT | 2.8% | 2.7% | -19 | +78 |
4Q 2014 U.K. Gross Domestic Product (GDP)
The U.K. economy expanded at a slower-than-expected pace during the last three-months of 2014 as the growth rate climbed an annualized 2.7% following a 2.6% rise in the third-quarter. The lackluster recovery may encourage the Bank of England (BoE) to largely retain a wait-and-see approach in 2015, but we may see Governor Mark Carney continue to prepare U.K households and businesses for higher borrowing-costs as the central bank looks for a pickup in economic activity. The initial bearish reaction was short-lived as GBP/USD pushed above the 1.5100 handle ahead of the North America trade, with the pair ending the day at 1.5165.
--- Written by David Song, Currency Analyst and Shuyang Ren
To contact David, e-mail dsong@dailyfx.com. Follow me on Twitter at @DavidJSong.
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