Talking Points:
- The UK economy grew at a miserly 0.1% in Q1 2018 missing expectations.
- A May Bank of England rate hike now looks highly unlikely.
- GBP sell-off may offer opportunities for disciplined traders.
The DailyFX Q2 Trading Forecast for GBP is now available.
How are Retail Traders Currently Positioned in GBPUSD and EURGBP and why it matters.
Fundamental Forecast for GBP: Neutral
The first look at UK Q1 GDP sent shivers through the market, and sterling sharply lower, with data showing a mere 0.1% growth rate in the UK in the first quarter of 2018. Combined with inflation moving towards the BoE’s target of 2% and recent comments from BoE governor Mark Carney saying that interest rate hikes this year are ‘likely’ but gradual, markets have now priced out a rate hike in May, after having priced in an 85% probability just over a week ago, leaving the August MPC meeting now as the most likely date for a rate increase. With a rate hike now priced-out however, the opportunity for a shock UK rate hike now exists which would see Sterling regain recent losses quickly.
Our weekly outlook for Sterling remains neutral.
Next week’s data calendar is sparse with only the monthly PMI releases offering any trading opportunities. These releases are for April and should show a clearer picture of the UK economy with little weather-related impact in the numbers.
While we remain neutral overall on Sterling, the latest sell-off does open opportunities for longer-term Sterling bulls in specific pairs. We would look past GBPUSD due to the ongoing strength of the US dollar and climbing US bond yields while EURGBP may present a better opportunity although Brexit discussions and news flow is likely to increase over the next few weeks. The Euro is also under pressure after the latest ECB meeting gave no clues on future monetary policy, leaving the currency susceptible to further bouts of selling.
One pair that may offer Sterling bulls a disciplined trading opportunity is GBPCAD which is currently trading just 30 pips away from a six-week low. The February 8 high at 1.7664 shields the long-term uptrend – currently around 1.7620 – while the cluster of trade down to the 38.2% retracement level at 1.7430 will also act as firm support.
GBPCAD Daily Price Chart (September 4, 2017 – April 27, 2018)
If you are new to the foreign exchange market, we have an updated New to FX Guide to help you start your journey.
--- Written by Nick Cawley, Analyst.
You can contact the author via email at nicholas.cawley@ig.com or via Twitter @nickcawley1.
