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GBP/USD to Mount Larger Rebound on Upbeat 3Q U.K. GDP Report

GBP/USD to Mount Larger Rebound on Upbeat 3Q U.K. GDP Report

2015-10-27 05:00:00
David Song, Shuyang Ren,
Share:

- 3Q U.K. GDP to Expand Another Annualized 2.4%- Slowest Since 3Q 2013.

- Will Stronger GDP Spur Larger Dissent Within the Bank of England (BoE)?

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 Gross Domestic Product (GDP) report may heighten the appeal of the sterling and spur a larger rebound in GBP/USD as the economy is expected to expand another annualized 2.4% in the third-quarter of 2015.

What’s Expected:

GBP/USD 3Q GDP

Click Here for the DailyFX Calendar

Why Is This Event Important:

Even though the economy grows at the slowest pace in since 2013, data prints pointing to a more sustainable recovery may keep the Bank of England (BoE) on course to normalize monetary over the near to medium-term and generate a greater dissent within the central bank as the outlook for growth and inflation improves.

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

Expectations: Bullish Argument/Scenario

Release

Expected

Actual

Retail Sales ex Auto Fuel (MoM) (SEP)

0.4%

1.7%

Industrial Production (MoM) (AUG)

0.3%

1.0%

Mortgage Approvals (AUG)

69.8K

71.0K

The pickup in private-sector consumption accompanied the rise in business outputs may offer a better-than-expected GDP print, and signs of a stronger recovery may encourage a bullish reaction in GBP/USD as it boosts interest rate expectations.

Risk: Bearish Argument/Scenario

Release

Expected

Actual

Jobless Claims Change (SEP)

-2.2K

4.6K

Average Weekly Earnings ex. Bonus (3MoY) (AUG)

3.0%

2.8%

Trade Balance (AUG)

-2.150B

-3.268B

Nevertheless, waning demand from abroad paired with the slowdown in job growth may drag on the real economy, and a dismal report may push the BoE to further delay its normalization cycle in an effort to further mitigate the downside risks surrounding the region.

How To Trade This Event Risk(Video)

Bullish GBP Trade: U.K. Economy Expands Another 2.4% or Greater

  • Need green, five-minute candle following the GDP report 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: 3Q GDP Report Disappoints

  • 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

GBPUSD Daily

GBP/USD Daily Chart

Chart - Created Using FXCM Marketscope 2.0

  • GBP/USD appears to have carved a near-term top in October amid the lack of momentum to hold above the 1.5500 handle, while the Relative Strength Index (RSI) largely retains the bearish formation carried over from May.
  • DailyFX Speculative Sentiment Index (SSI) shows the retail crowd remains net-long GBP/USD since August 21, but the ratio remains off of recent extremes as it sits at +2.04, with 67% of traders long, while open interest stands 6.3% below its monthly average going into the end of October.
  • Interim Resistance: 1.5640 (50% expansion) to 1.5650 (38.2% expansion)
  • Interim Support: 1.5089 (May low) to 1.5090 (61.8% retracement)

Read More:

GBP/USD Rebound Vulnerable to Weak U.K. 3Q Gross Domestic Product (GDP) Report

British Pound Forecast to Fall Further versus Dollar

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 2015

07/28/2015 08:30 GMT

2.6%

2.6%

+67

+73

2Q 2015 U.K. Gross Domestic Product (GDP)

GBP/USD Chart

The 2Q U.K. Gross Domestic Product (GDP) report was largely in-line with market expectations as the growth rate increased an annualized 2.6%, with the economy expanding 0.7% on a quarterly basis. Signs of a steady recovery may encourage the Bank of England (BoE) on course to normalize monetary policy, and Governor Mark Carney may continue to prepare U.K. households and businesses for higher borrowing-costs as the central bank anticipates stronger inflation to emerge over the coming months. Sterling surged following the GDP report, with GBP/USD climbing above the 1.5550 region and closing the North-American session at 1.5611.

--- 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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