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GBP/USD at Risk for Fresh Monthly Lows on Slowing U.K. GDP

GBP/USD at Risk for Fresh Monthly Lows on Slowing U.K. GDP

2014-10-24 04:00:00
David Song, Shuyang Ren,
Share:

- 3Q U.K. GDP of 0.7% Would Mark the Slowest Rate of Growth Since 4Q 2013.

- Slower Economic Recovery Likely to Further Delay the BoE’s Normalization Cycle.

For more updates, sign up for David's e-mail distribution list.

Trading the News: U.K. Gross Domestic Product (GDP)

The U.K.’s 3Q Gross Domestic Product (GDP) report may spur a lower-low in GBP/USD should the advance reading drag on interest rate expectations.

What’s Expected:

GBP/USD GDP

Click Here for the DailyFX Calendar

Why Is This Event Important:

A marked slowdown in the U.K. economy may continue to spur a 7-2 split within the Monetary Policy Committee (MPC) as Governor Mark Carney remains in no rush to normalize monetary policy, and the GBP/USD may face a further decline over the remainder of the year as the Fed prepares to exit it easing cycle.

For Real-Time Updates and Potential Trade Setups on the British Pound, sign up for DailyFX on Demand

Expectations: Bearish Argument/Scenario

Release

Expected

Actual

Retail Sales ex Auto (MoM) (SEP)

0.0%

-0.3%

Industrial Production (MoM) (AUG)

0.0%

0.0%

CBI Business Optimism (OCT)

15

8

Lower business outputs paired with the slowdown in private-sector consumption may dampen bets of seeing a stronger recovery in the U.K., and a dismal 3Q GDP print may trigger fresh monthly lows in the GBP/USD especially as the BoE retains a rather neutral tone for monetary policy.

Risk: Bullish Argument/Scenario

Release

Expected

Actual

ILO Unemployment Rate (3M) (AUG)

6.1%

6.0%

Markit Purchasing Manager Index- Construction (SEP)

63.5

64.2

NIESR GDP Estimate (SEP)

--

0.7%

Nevertheless, the expansion in building activity along with the ongoing improvement in the labor market may pave the way for a better-than-expected growth report, and a positive development may spur a larger dissent within the BoE as the fundamental outlook for the U.K. improves.

Read More:

Price & Time: Deciphering the Short-Term USD Wiggles

GBP/USD Rallies from 61.8% of Rally

How To Trade This Event Risk(Video)

Bearish GBP Trade: U.K. GDP Slows to 0.7% or Lower

  • Need red, five-minute candle following the GDP print to consider a short British Pound trade
  • If market reaction favors bearish sterling trade, short GBP/USD with two separate position
  • Set stop at the near-by swing high/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

Bullish GBP Trade: 3Q Growth Rate Exceeds Market Forecast

  • Need green, five-minute candle to favor a long GBP/USD trade
  • Implement same setup as the bearish British Pound trade, just in reverse

Potential Price Targets For The Release

GBP/USD Daily Chart

GBP/USD Daily Chart

Chart - Created Using FXCM Marketscope 2.0

  • Despite the string of lower-highs, need a break of the bullish RSI momentum to favor fresh lows.
  • Interim Resistance: 1.6280 (38.2% retracement) to 1.6300 (50.0% retracement)
  • Interim Support: 1.5890 (61.8% retracement) to 1.5900 (50.0% expansion)

For LIVE SSI Updates Ahead of the U.S. GDP Print, Join DailyFX on Demand

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

Period

Data Released

Estimate

Actual

Pips Change

(1 Hour post event )

Pips Change

(End of Day post event)

2Q 2014

07/25/2014 8:30 GMT

0.8%

0.8%

-5

+1

2Q 2014 U.K. Gross Domestic Product (GDP)

GBP/USD Chart

As expected, the U.K. economy expanded another 0.8% in the second quarter of 2014 following the 0.8% rate of growth in the first three months of the year. The lackluster recovery in the U.K. may continue to drag on interest rate expectations as the Bank of England (BoE) remains in no rush to normalize monetary policy, and the British Pound may face additional headwinds over the rest of the year should the central bank scale back its willingness to raise the benchmark interest rate off of the record-low. The initial reaction was largely mixed as the GBP/USD quickly fell back from the 1.6990 region, and the pair continued to consolidate throughout the North American trade as it ended the day at 1.6974.

--- Written by David Song, Currency Analyst and Shuyang Ren

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

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