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GBP/USD Set for Another Break on Volatility with UK GDP

GBP/USD Set for Another Break on Volatility with UK GDP

2016-10-27 01:37:00
John Kicklighter, Chief Strategist
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Talking Points:

  • Key event risk continues to spur volatility but it continues to fall short on the trends traders want
  • EUR/USD has started to turn up from its bear trend as market conditions pull it back to market norms
  • We should consider volatility vs trend potential with upcoming event risk like UK 3Q GDP and Deutsche Bank earnings

See what live coverage is scheduled to cover key event risk for the FX and capital markets on the DailyFX Webinar Calendar.

We are heading into a round of high-level event risk in the coming final 48 hours to the trading week. Events like UK and US 3Q GDP, Deutsche Bank earnings and the UK credit rating review by Standard & Poor's have the clout necessary to shake the foundations of their target markets. Yet, in the face of this ominous data; we have to remember the type of market we are dealing with. While volatility is a ready conductor for a significant surprise in data, trends are difficult to muster - and thereby rare - in this period of complacency and skepticism.

Restraint was the name of the game for the Australian Dollar following this past session's Australian CPI release for the third quarter. A better-than-expected outcome meant that the threat of further RBA rate cuts has cooled even more. Moving along the monetary policy spectrum has generated much of the FX market's broader trends over the years, so the AUD/USD's and crosses' rally was not surprising. However, after an initial swell of volatility, the benchmark stalled and retreated when it came into meaningful resistance (0.7700). The same circumstances were true on AUD/JPY as it retreated from 80, just with heavier fundamentals and less conflict in future event risk - which is why I chose to fade it. It is this kind of market condition curb which should be incorporated in our assessment of the big ticket event risk ahead.

In Thursday's session, there are two particular themes that will find fuel for their recent infernos: UK 3Q GDP and the Deutsche Bank earnings. The Sterling has suffered under the growing fret related to Brexit. October has seen GBP/USD drop more than 8 percent from open to trough. That said, much of this drive has been founded on surveys and threats. This broad growth report from July 1 to September 30 will give a more binary assessment of the actual health in the lead up to Brexit's trigger. A bullish surprise would be dramatic, a bearish one feeding an existing bias. But follow through will still struggle. The same is likely true of the earnings report which will tape European financial conditions concerns and perhaps even strike a nerve in global risk trends. While it may punch above its weight, trend will still be a difficult sell. We discuss key event risk in contained market conditions in today's Trading Video.

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