British Pound Looks to 3Q GDP to Keep the Bullish Momentum

It’s been a long time since we could say that upcoming event risk could produce a meaningful change in the underlying trend of the British pound (short of extending the currencies painful tumble). However, the economic docket ahead certainly has that potential. There is a range of notable economic indicators on deck; but only two can truly redefine the currency’s future. The first release to take note of (and the most likely to reverse or maintain this past week’s momentum) is the minutes of the central bank’s last rate decision due on Wednesday. If there is any merit to Fisher’s forecast for the MPC to put a pause on their quantitative easing program, it could very well come from this report. On the other hand, if his outlook perhaps was for something further down the line; then no mention of a change from the status quo could send a bearish ripple through the sterling crosses. It is very likely that policy officials wanted to hold off on making any decisions until after the release of the initial third quarter growth numbers. This would be a reasonable move and it could give some official support for such a change in policy; but the reversal that we saw last week was borne out of sheer sentiment. To sustain such a move, we need a real fundamental backing. The other scenario would be confirmation that the purchasing program has indeed been put on hiatus which would be the first genuine change in the bank’s policy tone since the financial crisis picked up steam. Such an event could truly alter the currency’s standing in the FX market.

The other major event for the week is Friday’s third quarter gross domestic product release. It is unfortunate, from a traders’ perspective, that this report comes out just before the weekend; because if it was released on a Monday there would be far more liquidity and time for the reaction to play out. However, as it is, there are mere hours to trade on the data before the weekend drains liquidity and rational minds can take over. This is not to mean this is going to be a non-event. Far from it. The bleak economic outlook for Europe’s second largest economy has been the source of the sterling’s weakness over the past 12 to 18 months. When the outlook for the global economy was pointing to a recession, the UK was projected to see the worst of it. In the subsequent reversal, the United Kingdom was seen struggling to pull itself up. Should the 3Q reading report growth in the period through September, it would be a major step towards seeing a more meaningful recovery. A positive reading will be considered bullish; and the bigger the upside surprise, the more aggressive the pound’s run will be. Read through the details of the report though.   – JK