All eyes will be on be on Tuesday’s UK Fourth Quarter Gross Domestic Product growth rate numbers—one of the first such Q4 GDP reports out of the world’s largest economies. Consensus forecasts call for the first quarter-on-quarter UK economic expansion since the onset of the “Great Recession”. Such lofty expectations could clearly make for sharp price volatility on especially noteworthy disappointments, and the British Pound’s recent outperformance will almost certainly be put to the test.
It is especially interesting to note that the GBP has proven somewhat immune to the recent sharp deterioration in financial market risk sentiment. The previously high-yielding currency has historically been susceptible to sharp depreciation through times of financial market duress. The Pound nonetheless held strong despite the worst 2-day performance in the S&P 500 since early 2009 tumbles. Said feat is especially impressive given that the US Dollar remains a top target of safe-haven market flows, and relative stability in the GBP/USD bodes well for short-to-medium-term trends.
Forex futures and options data confirms that trader sentiment on the British Pound is far from dire, and we expect the GBP to outperform the EUR, AUD, NZD, and CAD if there are continued periods of financial market turmoil. Given aggressive S&P 500 declines, we see risk of a much larger correction in financial market risk sentiment. - DR
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