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GBPUSD May Be the Best Major to Highlight a Weak US GDP

GBPUSD May Be the Best Major to Highlight a Weak US GDP

2019-07-26 03:17:00
John Kicklighter, Chief Currency Strategist
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GDP Talking Points:

  • Top event risk through Friday's close is the United States 2Q GDP reading
  • The US - and by virtue the Dollar - has garnered considerable support this week through favorable growth signals
  • While US GDP may print favorably, the steady bid and Fed rate cut backdrop leverage greater potential from any shortfall

See how retail traders are positioning in Dollar, including EURUSD, GBPUSD and other key pairings using the DailyFX speculative positioning data on the sentiment page.

The Fundamental Skew Built Behind the Dollar Through Growth Winds

This past session, the EURUSD prove a magnet for volatility. The appeal of the pair was mixed given the high profile event risk from the ECB rate decision and the ominous technical bearing with the pair leaning on a range low that could open the market to levels not seen in two years. Yet, anticipation on the Dollar side was an inconvenient disruptor which threatened to short-circuit potential. And, that is ultimately what would happen. With the US 2Q GDP reading on tap for Friday, anything Dollar-based would find it difficult to mount a distinct and lasting bull or bear trend with such an uncertainty hanging over its head. Yet, now the market is due to pay the piper. The world's largest economy is due to reports its latest economic report, and anticipation has put in for a hefty skew. This week, we have seem the IMF seed an unexpected enthusiasm for the US economy by nudging its own forecast for 2019 higher (0.3 ppt) while edging the global outlook lower (-0.1 ppt). That picture was further filled in by the July PMIs which showed an uptick for the US composite while Japan floundered below 50 and the Eurozone reading dropped. This has left us with an inherent assumption that US is on a stronger course than its major counterparts.

A Technical Picture of the US Dollar

With the market padding the fundamental outlook for the US, there is little surprise that the Dollar has found its way higher. There is an unmistakable buoyancy for the Greenback over the past week in particular. This hasn't bee a move that has forced any critical technical breaks, but it has certainly driven the currency back from the brink on a few pairs - like AUDUSD. With EURUSD within striking distance of its range low at 1.1100, USDJPY flirting with a reversal and GBPUSD worked into a wedge; there is a potential for a break. That said, a break in favor of the Greenback will prove difficult - though not impossible - to achieve. Given build up over the week, there is already some favorable lift behind the USD. Furthering the growth-based skew is possible, but the further marginal return will be lost in the weekend liquidity drain and anticipation of Wednesday's FOMC rate decision.

Chart of DXY Dollar Index with 200-Day Moving Average (Daily)

Chart of DXY Dollar Index

Alternatively, with a short-term build up in elevation that has distracted from an overbearing theme like monetary policy, the potential for 'disappointment' is far more significant. Undermining the IMF's forecasts and minimizing the importance of a singular month's proprietary activity gauge can cater nicely to a short-term reversal fueled by the return of interest in a likely dovish turn from the central bank ahead. It is important to distinguish a reversal without a clear boundary from a turn within a range. The latter is far more feasible, and it helps filter expectations.

Why the Pound Makes a Better Dollar-Bear Partner

Beyond just the positioning of with Dollar on a technical basis, an important qualification for the cross that can take advantage of a speculative rebalancing is to select a counterpart without its own overwhelming influence. EURUSD is certainly interesting given its clearance of the ECB rate decision without a full-tilt rally, but the Euro-area 2Q GDP figures next week are important enough that they could anchor a prevailing move in anticipation. USDJPY has the BOJ and risk while also lacking the technical intrigue. AUDUSD and USDCAD are each interesting but the former is not as charged medium-term and USDCAD is only now attempting a short-term bullish break. My preference is actually GBPUSD.

Chart of GBPUSD (Daily)

Chart of GBPUSD

In the 'Cable' we have a pair that has been absolutely racked by fear of the impending Brexit with a steady descent these past few months leaving the benchmark pair heavily depressed and the Sterling strained across the financial system. New Prime Minister Boris Johnson raises the risk of a no-deal Brexit, but his pursuit of this line will be hampered by key dates and the fairly higher risk of a general election challenge which further delays everything. That certainly represents risk, but it is also profound delay that can help return the focus back onto the Dollar's motivation.

What if the US GDP Impresses and Prompts Dollar Strength?

While I believe the greater market-moving potential would follow a US GDP reading that disappoints and sends the recently lifted Dollar stumbling, it is always worth considering alternative outcomes to simply be prepared. If the country's growth prospects only build upon the IMF outlook and July activity figures, it will be important to identify a pair with reasonable traction. EURUSD would be a poor choice as triggering a multi-year breakdown would require far greater conviction than we can reasonably muster short of the FOMC decision. USDCAD on the other hand is better suited with the recent inverse head-and-shoulders pattern neckline break, yet it still traverses a recent range. We focus on the Dollar pairs heading into the US 2Q GDP reading in today's Quick Take video.

Chart of USDCAD with 20-Day Moving Average (Daily)

Chart of USDCAD

If you want to download my Manic-Crisis calendar, you can find the updated file here.

Watch the US GDP release and its impact on the market live with Senior Currency Strategist Christopher Vecchio, CFA starting 15 minutes before the official release. Sign up for the event on the DailyFX webinar calendar.

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