British Pound to Target Fresh Highs on Strong 4Q U.K. GDP

- U.K. GDP to Expand for Fourth Consecutive Quarter

- 0.8% Growth Rate Remains the Highest Print for 2013

Trading the News: U.K. Gross Domestic Product

The U.K. economy is expected to grow another 0.7% in the fourth-quarter, and a marked pickup in 4Q GDP may spark fresh highs in the British Pound as it puts increased pressure on the Bank of England (BoE) to normalize monetary policy ahead of schedule.

What’s Expected:

Time of release: 01/28/2014 9:30 GMT, 4:30 EST

Primary Pair Impact: GBPUSD

Expected: 0.7%

Previous: 0.8%

DailyFX Forecast: 0.7% to 1.0%

Why Is This Event Important:

Indeed, there’s growing bets that the BoE will implement a dovish twist to its forward-guidance as the unemployment rate quickly approaches the 7% threshold, but Governor Mark Carney may adopt a more hawkish tone for monetary policy amid the stronger-than-expected recovery in the U.K.

Expectations: Bullish Argument/Scenario

The ongoing improvement in the labor market paired with the resilience in private-sector consumption may spur a strong 4Q GDP print, and a positive development should spur a bullish reaction in the GBPUSD as the central bank moves away from its easing cycle.

Risk: Bearish Argument/Scenario

However, the widening trade deficit along with the slowdown in business outputs may drag on the growth rate, and a dismal GDP figure may generate a larger correction in the pound-dollar as market participants weigh the outlook for monetary policy.

How To Trade This Event Risk(Video)

Join DailyFX on Demand for Current Trade Setups on the British Pound

Bullish GBP Trade: 4Q GDP Climbs 0.7% or Greater

• Need green, five-minute candle following the GDP print to consider a long British Pound trade
• If reaction favors a buy trade, long GBPUSD with two separate position
• Set stop at the near-by swing low/reasonable distance from entry; look for at least 1:1 risk-to-reward
• Move stop to entry on remaining position once initial target is hit, set reasonable limit

Bearish GBP Trade: U.K. Growth Rate Misses Market Forecast

• Need red, five-minute candle to favor a short GBPUSD trade
• Implement same setup as the bullish British Pound trade, just in the opposite direction

Potential Price Targets For The Release

GBPUSD Daily

Chart - Created Using FXCM Marketscope 2.0

• Remains Bullish Above 1.6300 (Higher Low); Searching for Higher High
• Price & Relative Strength Index Retain Bullish Trend From July
• Interim Resistance: 1.6700 Pivot to 1.6730 (100.0 expansion)
• Interim Support: 1.6300 Pivot to 1.6310 (50.0 expansion)

Impact that the U.K. GDP report has had on GBP during the last quarter

3Q A 2013 U.K. Gross Domestic Product

The advance 3Q GDP print out of the U.K. came in in line with expectations, prompting an initial spike in Pound strength. Nevertheless, USD saw a slight comeback as the trading week came to a close. With U.K. growth expectations only having strengthened since then, this release will be closely watched with estimates pointing to a YoY growth rate not seen since 2008, although market participants may pare back bets ahead of the FOMC on Wednesday.

--- Written by David Song, Currency Analyst

To contact David, e-mail dsong@dailyfx.com. Follow me on Twitter at @DavidJSong.

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