GBP/USD to Eye June High on Stronger U.K. 1Q GDP
- U.K. 1Q GDP to Expand Annualized 2.5%- Slowest Pace of Growth Since 4Q 2013.
- Will Signs of Stronger Recovery Boost Bets for BoE Rate Hike?
Trading the News: U.K. Gross Domestic Product (GDP)
An upward revision in the U.K. 1Q Gross Domestic Product (GDP) report may heighten the appeal of the British Pound and spur a near-term advance in GBP/USD as it puts increased pressure on the Bank of England (BoE) to normalize monetary policy sooner rather than later.
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Why Is This Event Important:
Signs of a stronger recovery may spur a growing dissent within the Monetary Policy Committee (MPC) as board member Martin Weale sees scope to raise the benchmark interest rate as early as August, and we may see a growing number of BoE officials adopt a hawkish tone over the coming months should the fundamental developments coming out of the U.K. boost the outlook for growth and inflation.
Expectations: Bullish Argument/Scenario
|Retail Sales inc. Auto Fuel (MoM) (MAY)||-0.1%||0.2%|
|Weekly Average Earnings ex. Bonus (3MoY) (APR)||2.5%||2.7%|
|Industrial Production (MoM) (APR)||0.1%||0.4%|
The pickup in private sector consumption along with the expansion in business outputs may generate a strong growth figure, and a marked upward revision may boost interest rate expectations as the BoE remains on course to normalize monetary policy.
Risk: Bearish Argument/Scenario
|Mortgage Approvals (MAY)||68.8K||64.4K|
|BBA Loans for House Purchases (MAY)||43.4K||42.5K|
|Construction Output s.a. (MoM) (APR)||0.1%||-0.8%|
However, the slowdown in building activity along with the softening in private-sector credit may lead to a lackluster GDP print, and fears of a slower recovery may drag on the British Pound as it gives the central bank greater scope to retain its wait-and-see approach throughout 2015.
How To Trade This Event Risk(Video)
Bullish GBP Trade: U.K. Economy 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: 1Q GDP Falls Short of Market Expectations
- Need red, five-minute candle to favor a short GBP/USD trade.
- Implement same setup as the bullish sterling trade, just in reverse.
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Potential Price Targets For The Release
Chart - Created Using FXCM Marketscope 2.0
- After carving a higher-high in June, will retain a constructive outlook for GBP/USD as long as the RSI retains the bullish momentum carried over from back in April.
- DailyFX Speculative Sentiment Index (SSI) shows the retail crowd has flipped back to net-short GBP/USD on June 23, with the ratio currently sitting at -1.16.
- Interim Resistance: 1.5929 (June high) to 1.5940 (61.8% expansion)
- Interim Support: 1.5550 (50% retracement) to 1.5570 (38.2% retracement)
Impact that the U.K. GDP report has had on GBP/USD during the last release
|Period||Data Released||Estimate||Actual||Pips Change||Pips Change|
|03/31/2015 08:30 GMT||2.7%||3.0%||+8||+45|
Final 4Q 2014 U.K. Gross Domestic Product (GDP)
The final 4Q U.K. Gross Domestic Product (GDP) report showed an unexpected upward revision in the growth rate, with the economy expanding an annualized 3.0% amid an initial forecast for a 2.7% print. The better-than-expected reading was largely driven by exports, which increased by 4.6% over the last three-months of 2014. Signs of a stronger recovery may encourage the Bank of England (BoE) to adopt a more hawkish tone in 2015, but the committee may continue to endorse a wait-and-see approach over the near to medium-term as the central bank highlights the ongoing slack in the real economy. The initial bullish market reaction was short-lived, with GBP/USD struggling to push above the 1.4800 handle, but the sterling gained ground going into the North American trade, with the pair ending the day at 1.4814.
--- Written by David Song, Currency Analyst and Shuyang Ren
To contact David, e-mail email@example.com. Follow me on Twitter at @DavidJSong.
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