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GBP/USD Risks Near-Term Breakout on Strong 2Q U.K. GDP Report

GBP/USD Risks Near-Term Breakout on Strong 2Q U.K. GDP Report

2015-07-28 04:00:00
David Song, Shuyang Ren,
Share:

- 2Q U.K. GDP to Expand 0.7% After Expanding at Slowest Pace Since 3Q 2013.

- Will the Bank of England (BoE) Show a Greater Willingness to Normalize Policy?

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

The U.K.’s Gross Domestic Product (GDP) report is expected to show the economy expanding 0.7% in the second-quarter of 2015, and a faster rate of growth may boost the appeal of the British Pound and generate 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.

What’s Expected:

GBP/USD UK GDP

Click Here for the DailyFX Calendar

Why Is This Event Important:

Signs of a stronger recovery may spur a greater dissent within the Monetary Policy Committee (MPC) as a growing number of central bank officials adopt a more hawkish outlook for inflation, and we may see a tightening race between the BoE & Fed to normalize monetary policy as Governor Mark Carney continues to prepare U.K. households and businesses for higher borrowing-costs.

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Expectations: Bullish Argument/Scenario

Release

Expected

Actual

CBI Business Optimism (JUL)

1

8

Industrial Production (MoM) (MAY)

-0.2%

0.4%

GfK Consumer Confidence (JUN)

2

7

Improved confidence along with the pickup in business outputs may encourage a strong GDP print, and a marked expansion in economic activity may boost interest rate expectations as the BoE remains on course to lift the benchmark interest rate off of the record-low.

Risk: Bearish Argument/Scenario

Release

Expected

Actual

Retail Sales ex Auto Fuel (MoM) (JUN)

0.4%

-0.2%

Jobless Claims Change (JUN)

-9.0K

7.0K

Construction Output s.a. (MoM) (MAY)

0.8%

-1.3%

Nevertheless, easing job growth paired with the slowdown in private sector-consumption may drag on the growth rate, and a dismal development may lead to further delay in the BoE’s normalization cycle as the central bank remains unanimous in preserving the current policy stance.

How To Trade This Event Risk(Video)

Bullish GBP Trade: U.K. GDP Expands 0.7% or Greater

  • Need green, five-minute candle following the GDP print to consider a long British Pound trade.
  • If market reaction favors bullish sterling trade, long 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: 2Q Growth Rate 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 reverse.

Potential Price Targets For The Release

GBPUSD Daily

GBP/USD Daily Chart

Chart - Created Using FXCM Marketscope 2.0

  • Lack of momentum to close above 1.5630 (38.2% retracement) to 1.5650 (38.2% retracement) may keep GBP/USD confined with the wedge/triangle formation carried over from June as market participants weigh the outlook for monetary policy.
  • The DailyFX Speculative Sentiment Index (SSI) shows the retail crowd remains net-long GBP/USD since July 1, but we’re seeing the ratio come off of extremes as it narrows to +1.35, with 57% of traders long the pair.
  • Interim Resistance: 1.5750 (23.6% retracement) to 1.5780 (38.2% retracement)
  • Interim Support: 1.5330 (78.6% retracement) to 1.5350 (50% retracement)

Read More:

GBP/USD Approaches Near-Term Resistance Ahead of 2Q U.K. GDP Report

Price & Time: What Is GBP Volume Telling Us?

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)

1Q 2015

04/28/2015 08:30 GMT

2.6%

2.4%

+12

+117

1Q 2015 U.K. Gross Domestic Product (GDP)

GBP/USD Chart

The 1Q U.K. Gross Domestic Product (GDP) fell short of market expectations as the preliminary reading showed an annualized 2.4% rise in the growth rate following the 3.0% expansion during the last three-months of 2014. The slower rate of growth may encourage the Bank of England (BoE) to preserve its wait-and-see approach throughout 2015, but Governor Mark Carney may continue to prepare U.K households and businesses for higher borrowing-costs as the central bank head anticipates a stronger recovery in the second-half of the year. The market reaction to the dismal GDP print was short-lived, with GBP/USD snapping back above the 1.5200 handle, and the pair tracked higher throughout the North American trade to end the day at 1.5337.

--- 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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