Feb 25

U.K. GDP (09:30 GMT)

Expectations: -0.5%

Prior: -0.5%

Fundamental Outlook

Economic activity in the U.K. is expected to fall 0.5 percent in the fourth quarter after climbing 0.7 percent during the three months ending in September. The reading is of particular importance due to uncertainty surrounding the economic outlook in the region, while consumer prices remain stubbornly above the central bank’s target.

To understand the significance of tomorrow’s GDP release, it is important to take a look at inflation and other fundamental developments in Great Britain. In January, consumer prices rose an annualized 4.0 percent to mark its highest level since November 2008. As a result, policy maker Spencer Dale joined his colleagues Andrew Sentance and Martin Weale in pushing for a rate hike. With inflation expected to push higher on the back of the increase in value added taxes (VAT) measures, the split amongst the MPC members may widen in the coming months. These recent developments have lead traders to price in a 24 percent chance that the Bank of England wil hike rates twenty five basis points at its next rate decision meeting on March 10th, 2011.

However, policy maker Adam Posen continues to vote for an increase in asset purchases as growth is predicated to come back under pressure amid the governments most violent spending cuts since the Second World War. At the same time, it is worth noting that BoE MPC member David Miles said that the U.K.’s recovery is “fragile,” and went onto add that “we want to start bringing inflation back down but if we decided interest rates were to go up, we need to know what impact this might have [in order not to] upset that recovery.”

All in all, a disappointing GDP report will not only lower interest rate expectations, but will also lead the GBPUSD to break its key support area of 1.610 and validate the bearish technical outlook.

Technical Outlook

GBPUSD 4 Hour Chart

U.K._GDP_Takes_Center_Stage_as_the_Pound_Remains_Under_Pressure_body_gbpusd.png, U.K. GDP Takes Center Stage as the Pound Remains Under Pressure

Charts Created Using FXCM’s Strategy Trader – Prepared by Michael Wright

GBPUSD: The pair is currently testing the rising 4 hour channel dating back to January 7th. It is also worth noting that the “crowd” is beginning to bet on a recovery in the pound. A complete shift in sentiment combined with a break and a 4 hour close below 1.610 will validate my bearish bias.

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Written by Michael Wright, Currency Analyst

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Michael Wright authors FX Headlines, Fundamentals vs. Technical’s, Intraday Trading, Weekly Spotlight, and Forex Trading Weekly Forecast