Slowing U.K. GDP to Fuel Bearish GBP/USD Outlook

- 4Q U.K. GDP to Expand Annualized 1.9%- Lowest Since 1Q 2013.

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

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

The U.K.’s Gross Domestic Product (GDP) report may renew the bearish sentiment surround Cable and spur a near-term decline in GBP/USD should the data dampen bets for Bank of England (BoE) rate-hike in 2016.

What’s Expected:

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Why Is This Event Important:

Even though the BoE remains upbeat on the economy, signs of a softer-than-expected recovery may encourage the central bank to retain its current policy throughout 2015 as it seems as though Governor Mark Carney remains in no rush to lift the benchmark interest rate off of the record-low.

Expectations: Bearish Argument/Scenario

Slowing outputs accompanied by weak consumption may drag on the growth rate, and a dismal GDP print may produce additional headwinds for the sterling as market participants push back bets for a BoE rate-hike.

Risk: Bullish Argument/Scenario

Nevertheless, the ongoing improvement in the labor market paired with the expansion in private-sector credit may have helped to boost economic activity in the U.K., and a positive development may generate a larger recovery in GBP/USD as it puts increased pressure on the Monetary Policy Committee (MPC) to normalize policy sooner rather than later.

How To Trade This Event Risk(Video)

Bearish GBP Trade: U.K. Economy Expands 1.9% or Less

• Need red, five-minute candle following the GDP report 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: 4Q GDP Report Exceeds Market Forecast

• 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

GBPUSD Daily

Chart - Created Using FXCM Marketscope 2.0

• The bearish patterns in price & the Relative Strength Index (RSI) casts a long-term bearish outlook for GBP/USD, but the pair may face a larger rebound in the days ahead as it appears to have a carved a lower-low in January, while the oscillator comes off of oversold territory.
• DailyFX Speculative Sentiment Index (SSI) shows the retail crowd remains net-long GBP/USD since November 19, but the ratio remains off of recent extremes as it currently holds at +2.14, with 68% of traders long.
• Interim Resistance: 1.4860 (78.6% retracement) to 1.4910 (61.8% retracement)
• Interim Support: 1.3870 (78.6% expansion) and 1.4000 pivot

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

3Q 2015 U.K. Gross Domestic Product (GDP)

The 3Q U.K. Gross Domestic Product (GDP) fell short of market expectations, with the growth rate increased an annualized 2.3% after expanding 2.5% during the three-months through June. Even though the Bank of England (BoE) prepares U.K. households and businesses for higher borrowing-costs, the slower-than-expected recovery may encourage Governor Mark Carney to further delay its normalization cycle as the Monetary Policy Committee (MPC) continues to highlight the downside risks to the inflation outlook. The initial reaction to the release was short-lived, with GBP/USD largely consolidating throughout the North American trade as the pair closed the day at 1.5299.

Read More:

GBP/USD – Trend vs Extreme Sentiment

Like Clockwork, Draghi’s Threat of Action Next Meeting Sinks EUR/USD

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S&P 500 - Everybody Too Bearish Too Soon?

--- 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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Trade Alongsidethe DailyFX Team on DailyFX on Demand--- 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.

Trade Alongsidethe DailyFX Team on DailyFX on Demand