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Robust U.K. GDP Report to Propel GBP/USD Rebound

Robust U.K. GDP Report to Propel GBP/USD Rebound

2016-10-27 04:00:00
David Song, Strategist
Share:

- U.K. Gross Domestic Product (GDP) to Expand Annualized 2.1% for Second Straight Quarter.

- Will Signs of Better-Than-Expected Growth Keep the Bank of England (BoE) on the Sidelines?

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

GBP/USD may stage a larger rebound over the next 24-hours of trade as the advance Gross Domestic Product (GDP) report is expected to show the U.K. economy expanding another annualized 2.1% in the third-quarter of 2016, and signs of better-than-expected growth may encourage the Bank of England (BoE) to retain the current policy throughout the remainder of the year as the central bank sees growing risk of overshooting the 2% target for inflation.

What’s Expected:

DailyFX Calendar

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Why Is This Event Important:

The BoE may continue to embark on its easing-cycle over the coming months as ‘a majority of members expect to support a further cut in Bank Rate to its effective lower bound,’ but Governor Mark Carney and Co. may largely endorse a wait-and-see approach going into 2017 as central bank officials warn the next quarterly inflation due out on November 3 will reflect the sharp decline in the exchange rate. Even though the threat of a ‘hard Brexit’ instills a long-term bearish outlook for the British Pound, GBP/USD may face a larger correction over the days ahead especially as the BoE appears to be in no rush to implement lower borrowing-costs.

Expectations: Bullish Argument/Scenario

Release

Expected

Actual

Employment Change (3Mo3M) (AUG)

76K

106K

Lloyds Business Barometer (SEP)

--

24

Net Consumer Credit (AUG)

1.4B

1.6B

The ongoing improvement in the labor market accompanied by the pickup in private-sector lending may foster a strong GDP report, and a positive development may spark a bullish reaction in the British Pound as market participants push out bets for a BoE rate-cut.

Risk: Bearish Argument/Scenario

Release

Expected

Actual

Retail Sales ex. Auto Fuel (MoM) (SEP)

0.2%

0.0%

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

0.0%

-1.5%

Trade Balance (AUG)

-4.000B

-4.733B

However, easing demand from home and abroad may drag on the growth rate, and a smaller-than-expected expansion in economic activity may undermine the recent rebound in GBP/USD as it puts increased pressure on the Monetary Policy Committee (MPC) to further support the real economy.

How To Trade This Event Risk(Video)

Bullish GBP Trade: U.K. GDP Expands Annualized 2.1% or Greater

  • Need a green, five-minute candle following the report to favor a long GBP/USD trade.
  • 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: 3Q Growth Report Falls Short of Market Expectations

  • Need a 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 Trading View

  • The longer-term outlook continues to favor the downside targets for GBP/USD as it preserves the bearish trend carried over from September, but the lack of momentum to close below 1.2100 (61.8% expansion) may foster a larger rebound in the exchange rate as the Relative Strength Index (RSI) climbs out of oversold territory (above 30) and breaks out of the downward trend; first topside hurdle comes in around 1.2360 (50% retracement) followed by 1.2460 (61.8% expansion).
  • Interim Resistance: 1.2920 (100% expansion) to 1.2950 (23.6% expansion)
  • Interim Support: 1.1905 (2016-low) and 1.2100 (61.8% expansion)

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

Period

Data Released

Estimate

Actual

Pips Change

(1 Hour post event )

Pips Change

(End of Day post event)

2Q

2016

07/27/2016 08:30 GMT

2.1%

2.2%

-20

+93

2Q 2016 U.K. Gross Domestic Product (GDP)

GBP/USD 10-Minute

GBP/USD Chart

Chart - Created Using Trading View

The U.K. economy grew an annualized 2.2% in the second-quarter of 2016 after expanding 2.0% during the first-three months of the year, but the longer-term outlook remains clouded with high uncertainty as the region prepares to depart from the European Union (EU). In response to the ‘Brexit’ vote, the Bank of England (BoE) looks poised to reestablish its easing cycle as the new government under Prime Minister Theresa May appear to be on course to trigger Article 50 of the Lisbon Treaty over the coming months. GBP/USD edged lower throughout the European trade even though the GDP report exceeded market expectations, but the weakness was short-lived, with the pair bouncing back from 1.3072 to end the day at 1.3220.

Get our top trading opportunities of 2016 HERE

Read More:

EUR/CAD Rebound or Reversal? Line-in-the-Stand at 1.4600

USD Breakout – Does it Have Room to Run?

Gold Price and Oil See Headwinds as USD Strongest Since February

Forex Technical Focus: Range Highs for Nikkei; USD/JPY Lags

--- Written by David Song, Currency Analyst

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

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DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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