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GBP/USD at Risk for Rebound on Upbeat 1Q U.K. GDP Report

GBP/USD at Risk for Rebound on Upbeat 1Q U.K. GDP Report

2015-05-28 04:00:00
David Song, Shuyang Ren,
Share:

- Preliminary U.K. 4Q GDP to Expand an Annualized 2.5% Amid Lowest Print Since 4Q 2013.

- Private Consumption to Climb 0.7% - Fastest Pace of Growth Since 3Q 2014.

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

An upward revision in the U.K. 1Q Gross Domestic Product (GDP) print may heighten the appeal of the British Pound and spur a near-term rebound in GBP/USD as signs of a stronger recovery raises the Bank of England’s (BoE) scope to normalize monetary policy sooner rather than later.

What’s Expected:

GBP/USD UK GDP

Click Here for the DailyFX Calendar

Why Is This Event Important:

A marked uptick in the growth rate may spur a growing dissent within the Monetary Policy Committee (MPC) as the central bank remains on course to normalize monetary policy, and we may see a greater number of BoE officials prepare U.K. households and business for higher borrowing-costs as the economy gets on a firmer footing.

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

Expectations: Bullish Argument/Scenario

Release

Expected

Actual

Construction Output s.a. (YoY) (MAR)

1.1%

1.6%

ILO Unemployment Rate (3M) (MAR)

5.5%

5.5%

Industrial Production (MoM) (MAR)

0.0%

0.5%

The pickup in business outputs along with the ongoing improvement in the labor market may stoke a larger-than-expected upward revision in the growth rate, and a positive development may produce a bullish reaction in the sterling as it boosts interest rate expectations.

Risk: Bearish Argument/Scenario

Release

Expected

Actual

Trade Balance (MAR)

-2.400B

-2.817B

Mortgage Approvals (MAR)

62.5K

61.3K

Retail Sales inc. Auto Fuel (YoY) (MAR)

5.4%

4.2%

However, the widening trade deficit paired with the ongoing slack in private-sector activity may drag on the growth rate, and a dismal GDP figure may further delay the BoE’s normalization cycle especially on the back of the uncertainties clouding the outlook for fiscal policy.

How To Trade This Event Risk(Video)

Bullish GBP Trade: U.K. 1Q GDP Expands Annualized 2.5% or Greater

  • Need to see green, five-minute candle following the GDP report to consider a long trade on GBP/USD.
  • If market reaction favors a long sterling trade, buy GBP/USD 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: Growth Rate, Personal Consumption Falls Short of Market Forecast

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

Potential Price Targets For The Release

GBP/USD Daily

GBP/USD Daily Chart

Chart - Created Using FXCM Marketscope 2.0

  • GBP/USD remains at risk for further weakness as price & the RSI fail to retain the bullish formation carried over from April; .
  • DailyFX Speculative Sentiment Index (SSI) shows the retail crowd remains net-long GBP/USD since May 21, with the ratio currently standing at +1.40.
  • Interim Resistance: 1.5550 (61.8% expansion) 1.5570 (38.2% retracement)
  • Interim Support: 1.5180 (23.6% retracement) to 1.5190 (50% retracement)

Read More:

USD/CAD at Risk for Breakout as Traders Dismiss BoC Rate Decision

Price & Time: Broader Trend Resuming in USD/CAD?

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

Period

Data Released

Estimate

Actual

Pips Change

(1 Hour post event )

Pips Change

(End of Day post event)

4Q P

2014

02/26/2015 09:30 GMT

2.7%

2.7%

+3

-123

4Q 2015 U.K. Gross Domestic Product (GDP)

GBP/USD Chart

The U.K. Gross Domestic Product (GDP) report was largely in-line with market expectation as the economy grew another annualized 2.7% during the last quarter of 2014. Even though the BoE remains on course to normalize monetary policy, the Bank of England (BoE) may retain its wait-and-see approach throughout 2015 as the ongoing slack in the real economy dampens the outlook for growth and inflation. The initial market reaction in the British Pound was short-lived, with GBPUSD sliding below the 1.5500 handle and ending the day at 1.5402.

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

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

To be added to David's e-mail distribution list, please follow this link.

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