Will Declining Growth Sink the Pound Further

How To Trade This Event Risk

U.K. GDP figures are expected to show growth show for a fourth consecutive quarter. The expected gain of 1.6% would be the lowest reading since June 2005, and would be a 1.7% decline from a year ago. Last quarter’s GDP was dragged lower by the a 1.6% decline in domestic investment, which has most likely declined further given the continued stickiness of the credit markets. Indeed, Mortgage approvals fell to 42,000 in May, the lowest level in nine years. Household consumption was the main driver of growth in the first quarter, which is expected to have declined as inflation rising to 3.8% has sapped consumer’s purchasing power. May saw a record 3.5% gain in retail sales on seasonal weather, which was immediately given back with a 3.9% drop in June. Britons reduced their purchases by over 3% in six out of seven categories including a 6.9% reduction in apparel. Exports have remained firm which could contribute to bottom line growth, but expectations were that a weak pound would drive them higher offsetting the declining domestic growth. The minutes from the BoE’s recent policy meeting revealed that the committee sees the downside risks to the economy increasing as they expect further deterioration in the housing market. Although, Tim Besley voted for a rate hike due to inflation rising above the 3% threshold, the slowdown in growth may make it prohibitive for the central bank to raise rates.

The negative expectations and recent softening fundamentals leaves the greatest chance for volatility with a rebound in growth., especially following the pound’s recent sell off after the drop in retail sales. Also, May’s record increase in consumption may skew the numbers leading to a better than expected result. With improved GDP readings from both the quarterly and annual figures, we will look for a five minute green candle to confirm entry on a long, two lot GBPUSD position. The stop for both lots will be set either at the nearby swing low or at a reasonable, fixed distance. The target on the first half of the trade will equal the distance to the stop, while the second lot’s objective should be taken on discretion. When the first lot takes profit, the stop on the second should be moved up to break even to conserve profit.

The most likely scenario, given the toll the housing slump, rising inflation and tight credit markets have exacted on the economy, is that growth has continued to slow. Given the considerable size of the expected decline a slight disappointment in the annual reading and zero or negative growth in the quarter will trigger a short trade. We will use the same criteria and strategy setup for a short as we would for the long, except in reverse.