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Bullish GBP/USD Bets Mired by Slowing UK GDP- 1.5050 Support in Focus

Bullish GBP/USD Bets Mired by Slowing UK GDP- 1.5050 Support in Focus

David Song, Shuyang Ren,

- 1Q U.K. GDP to Expand Annualized 2.6%- Slowest Pace of Growth Since 3Q 2013.

- Will the Bank of England’s (BoE) Inflation Report (May 13) Highlight a Slower Recovery?

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 1Q Gross Domestic Product (GDP) report may dampen the appeal of the British Pound and undermine the near-term rebound in GBP/USD as the growth rate is expected to increase an annualized 2.6% after expanding 3.0% during the last three-months of 2014.

What’s Expected:

GBP/USD GDP

Click Here for the DailyFX Calendar

Why Is This Event Important:

Threats of a slower recovery may encourage the Bank of England (BoE) to adopt a more dovish tone while delivering its quarterly inflation report on May 13, and the central bank may look to further delay its normalization cycle in an effort to stem the downside risks surrounding the region.

For Real-Time SSI 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) (MAR)

0.5%

0.2%

Average Weekly Earnings inc Bonus (3MoY) (FEB)

1.8%

1.7%

Trade Balance (Pound) (FEB)

-1.5000B

-2.859B

Weakening demand from home and abroad may pave the way for a marked slowdown in the growth rate, and a dismal GDP print may trigger a near-term topping process in GBP/USD as market participants scale back bets for higher borrowing-costs in the U.K.

Risk: Bullish Argument/Scenario

Release

Expected

Actual

Employment Change (3Mo3M) (FEB)

170K

248K

Manufacturing Production (MoM) (FEB)

0.4%

0.4%

Purchasing Manager Index- Manufacturing s.a. (MAR)

54.4

54.4

Nevertheless, the ongoing improvement in the labor market paired with the rebound in business outputs may generate a positive development, and an unexpected pickup in GDP may spur a larger advance in British Pound as it boosts interest rate expectations.

How To Trade This Event Risk(Video)

Bearish GBP Trade: U.K. GDP Slows to Annualized 2.6% 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: 1Q Growth Rate Exceeds Market Expectations

  • 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

  • Ongoing series of higher highs & lows favors a further advance in GBP/USD; could be at risk for a reversal as the RSI threatens the bearish momentum carried over from July 2014.
  • Seeing increased volatility in the DailyFX Speculative Sentiment Index (SSI) going into the end of the month as retail crowd flips back to net-short GBP/USD, with ratio currently holding at -1.25.
  • Interim Resistance: 1.5340 (78.6% retracement) to 1.5350 (50% retracement)
  • Interim Support: 1.5015 (50% expansion) to 1.5050 (50% retracement)

Read More:

USD/JPY Continues to Carve Lower-Highs Despite Japan Ratings Cut

Price & Time: Sterling Confluence

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)

4Q 2014

01/27/2014 09:30 GMT

2.8%

2.7%

-19

+78

4Q 2014 U.K. Gross Domestic Product (GDP)

GBP/USD Chart

The U.K. economy expanded at a slower-than-expected pace during the last three-months of 2014 as the growth rate climbed an annualized 2.7% following a 2.6% rise in the third-quarter. The lackluster recovery may encourage the Bank of England (BoE) to largely retain a wait-and-see approach in 2015, but we may see Governor Mark Carney continue to prepare U.K households and businesses for higher borrowing-costs as the central bank looks for a pickup in economic activity. The initial bearish reaction was short-lived as GBP/USD pushed above the 1.5100 handle ahead of the North America trade, with the pair ending the day at 1.5165.

--- 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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