FX Week Ahead - Top 5 Events: Q2’19 UK GDP & GBP/USD Rate Forecast
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UK GDP Overview:
- The Q2’19 UK GDP report is due out on Friday, August 9 at 08:30 GMT, and the data are expected to show a further deceleration in British growth.
- GBPUSD has been hammered ever since the ascension of Boris Johnson as UK prime minster, not exactly a surprise given his penchant for a no deal, hard Brexit.
- Retail traders have remained net-long since May 6 when GBPUSD traded near 1.2935; price has moved 6.0% lower since then.
Join me on Mondays at 7:30 EDT/11:30 GMT for the FX Week Ahead webinar, where we discuss top event risk over the coming days and strategies for trading FX markets around the events listed below.
08/09 FRIDAY | 08:30 GMT | GBP Gross Domestic Product (2Q P)
Concerns over a hard Brexit have flared in recent weeks, thanks largely to the ascendance of Boris Johnson as the next UK prime minister and his desire to leave the European Union on October 31, deal or no deal. But even before UK PM Johnson took control of 10 Downing Street, it was clear (thanks to the polls) that a no deal, hard Brexit leader was likely to head up the UK government.
Now, with the US-China trade war raging, there are multiple reasons for UK growth to have steadied, particularly as both business and consumer confidence has declined. Data from the end of the second quarter showed deterioration in UK economic activity: April UK industrial production fell by -2.7% on a monthly basis and -1% on a yearly basis; and April UK manufacturing production contracted by -3.9% on a monthly basis and -0.8% on a yearly basis.
Overall, the Citi Economic Surprise Index for the UK, a gauge of economic data momentum, plummeted from 16.4 to -43.7 over the course of the first quarter. Accordingly, the Bloomberg News consensus forecast for the Q2’19 UK GDP report calls for no growth on a quarterly basis and a slowdown to 1.4% from 1.8% on an annualized basis.
Pairs to Watch: EURGBP, GBPJPY, GBPUSD
GBPUSD Technical Analysis: Daily Timeframe (October 2016 to August 2019) (Chart 1)
The post-Brexit, multi-year symmetrical triangle forming in GBPUSD has broken to the downside in a decisive manner. Clearing out the lows from the January Yen flash-crash, GBPUSD has quickly seen prices erode since UK PM Boris Johnson took office. The break below 1.2381 has seen price losses accumulate in short order, falling back down to the March 2017 swing lows near 1.2109.
As is often the case with symmetrical triangle breakdowns, there is a likelihood of a return to the base of the triangle; in this instance, with a bearish break occurring, we’ll be looking for GBPUSD to return to the downside base of the symmetrical triangle, set in October 2016, at 1.1905 over the coming weeks.
IG Client Sentiment Index: GBPUSD Rate Forecast (August 2, 2019) (Chart 2)
GBPUSD: Retail trader data shows 78.5% of traders are net-long with the ratio of traders long to short at 3.65 to 1. In fact, traders have remained net-long since May 6 when GBPUSD traded near 1.2935; price has moved 6.0% lower since then. The number of traders net-long is 4.1% lower than yesterday and 0.2% higher from last week, while the number of traders net-short is 0.3% higher than yesterday and 6.9% higher from last week.
We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests GBPUSD prices may continue to fall. Yet traders are less net-long than yesterday and compared with last week. Recent changes in sentiment warn that the current GBPUSD price trend may soon reverse higher despite the fact traders remain net-long.
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--- Written by Christopher Vecchio, CFA, Senior Currency Strategist
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