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GBP Pares Losses as GDP Bounces Back, However, Brexit Remains Key Driver

GBP Pares Losses as GDP Bounces Back, However, Brexit Remains Key Driver

2018-08-10 09:42:00
Justin McQueen, Analyst
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GBPUSD Analysis and News

  • UKQ2 GDP Bounces Back
  • GBP Finds Little Support as Brexit Continues to Present the Biggest Obstacle

For a more in-depth analysis on Sterling, check out the Q3 Forecast for GBP/USD

UK Economy Bounces Back in Q2 After Q1 Slowdown

The UK economy picked up in Q2 after the weather hit slowdown seen in Q1. The first look at the Q2 GDP data showed a quarterly reading of 0.4%, taking the yearly rate to 1.3%, both readings had been in line with expectations. Consequently, this bounce back is likely to reassure the Bank of England in their decision to raise rates to 0.75% last week. Alongside the GDP figures, the ONS had released the latest manufacturing, construction and industrial output data, which overall had been generally firmer than expected. As such, this may provide a bit of life for the Pound, which has taken a hit this week.

Brexit is Biggest Catalyst for Sterling

What has been made apparent over the past week is that Brexit remains to be the key driver in the near term for GBP. Recent comments made by the UK Trade Minister that a “no-deal” Brexit is the most likely scenario, has seen markets reprice the possibility of a “no-deal”, prompting GBPUSD to fall to its lowest level since mid-2017, with the pair down 2.7% this month. This has also been reflected in option markets with options buyers increasing their demand for protection against deeper GBPUSD declines as risk reversals fall to levels since in early 2017.

Latest Trade Idea: GBPCAD Short: Rate Differentials Favour CAD, Brexit Weighs on GBP

GBPUSD PRICE CHART: 1-MINUTE TIME FRAME (INTRADAY August 10, 2018)

GBP Pares Losses as GDP Bounces Back, However, Brexit Remains Key Driver

Chart by IG

GBPUSD weaker on the back of the USD reaching fresh YTD highs as the rout in emerging markets begin to raise the threat of contagion in the EU. This followed reports from the FT that European banks have a notable amount of exposure to the Turkish Lira and thus leading to EURUSD breaking below key support at 1.15.

WHAT DOES CLIENT POSITIONING TELL US ABOUT THE NEXT MOVE IN GBP

IG Client Positioning shows that 74.4% of traders are net-long with the ratio of traders long to short at 2.9 to 1. In fact, traders have remained net-long since Apr 20 when GBPUSD traded near 1.40858; price has moved 9.3% lower since then. The number of traders net-long is 0.1% lower than yesterday and 3.0% higher from last week, while the number of traders net-short is 7.1% lower than yesterday and 4.0% lower from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests GBPUSD prices may continue to fall. Traders are further net-long than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger GBPUSD-bearish contrarian trading bias.

--- Written by Justin McQueen, Market Analyst

To contact Justin, email him at Justin.mcqueen@ig.com

Follow Justin on Twitter @JMcQueenFX

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

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