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Trading the News: U.K. Gross Domestic Product

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by , 10-24-2014 at 06:40 AM (1744 Views)
      
   
- 3Q U.K. GDP of 0.7% Would Mark the Slowest Rate of Growth Since 4Q 2013.
- Slower Economic Recovery Likely to Further Delay the BoE’s Normalization Cycle.

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

The U.K.’s 3Q Gross Domestic Product (GDP) report may spur a lower-low in GBP/USD should the advance reading drag on interest rate expectations.

What’s Expected:

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Why Is This Event Important:

A marked slowdown in the U.K. economy may continue to spur a 7-2 split within the Monetary Policy Committee (MPC) as Governor Mark Carney remains in no rush to normalize monetary policy, and the GBP/USD may face a further decline over the remainder of the year as the Fed prepares to exit it easing cycle.

Expectations: Bearish Argument/Scenario

Release Expected Actual
Retail Sales ex Auto (MoM) (SEP) 0.0% -0.3%
Industrial Production (MoM) (AUG) 0.0% 0.0%
CBI Business Optimism (OCT) 15 8

Lower business outputs paired with the slowdown in private-sector consumption may dampen bets of seeing a stronger recovery in the U.K., and a dismal 3Q GDP print may trigger fresh monthly lows in the GBP/USD especially as the BoE retains a rather neutral tone for monetary policy.

Risk: Bullish Argument/Scenario

Release Expected Actual
ILO Unemployment Rate (3M) (AUG) 6.1% 6.0%
Markit Purchasing Manager Index- Construction (SEP) 63.5 64.2
NIESR GDP Estimate (SEP) -- 0.7%

Nevertheless, the expansion in building activity along with the ongoing improvement in the labor market may pave the way for a better-than-expected growth report, and a positive development may spur a larger dissent within the BoE as the fundamental outlook for the U.K. improves.

How To Trade This Event Risk
Bearish GBP Trade: U.K. GDP Slows to 0.7% or Lower

  • Need red, five-minute candle following the GDP print to consider a short British Pound trade
  • If market reaction favors bearish sterling trade, short GBP/USD with two separate position
  • Set stop at the near-by swing high/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

Bullish GBP Trade: 3Q Growth Rate Exceeds Market Forecast

  • Need green, five-minute candle to favor a long GBP/USD trade
  • Implement same setup as the bearish British Pound trade, just in reverse

Potential Price Targets For The Release
GBP/USD Daily Chart

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  • Despite the string of lower-highs, need a break of the bullish RSI momentum to favor fresh lows.
  • Interim Resistance: 1.6280 (38.2% retracement) to 1.6300 (50.0% retracement)
  • Interim Support: 1.5890 (61.8% retracement) to 1.5900 (50.0% expansion)

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

Period Data Released Estimate Actual Pips Change
(1 Hour post event )
Pips Change
(End of Day post event)
2Q 2014 07/25/2014 8:30 GMT 0.8% 0.8% -5 +1

As expected, the U.K. economy expanded another 0.8% in the second quarter of 2014 following the 0.8% rate of growth in the first three months of the year. The lackluster recovery in the U.K. may continue to drag on interest rate expectations as the Bank of England (BoE) remains in no rush to normalize monetary policy, and the British Pound may face additional headwinds over the rest of the year should the central bank scale back its willingness to raise the benchmark interest rate off of the record-low. The initial reaction was largely mixed as the GBP/USD quickly fell back from the 1.6990 region, and the pair continued to consolidate throughout the North American trade as it ended the day at 1.6974.

--- Written by David Song, Currency Analyst and Shuyang Ren


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Comments

  1. newdigital's Avatar
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    GBPUSD M5: 45 pips price movement by GBP - GDP news event :

  2. newdigital's Avatar
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    GDP increased by 0.7% in Q3 2014 compared with Q2 2014



    GDP increased by 0.7% in the third quarter of 2014.The largest contribution to the increase came from the services sector, which increased by 0.7%.The increase in GDP followed growth of 0.9% in Q2 2014. In the latest quarter there were increases in all four main aggregates; output increased by 0.7% in services, 0.5% in production, 0.8% in construction and 0.3% in agriculture.

    GDP was 3.0% higher in Q3 2014 compared with the same quarter a year ago.

    GDP in the UK grew steadily during the 2000s until a financial market shock affected UK and global economic growth in 2008 and 2009. Economic growth resumed towards the end of 2009, but generally at a slower rate than the period prior to 2008. This growth was also erratic, with several quarters between 2010 and 2012 recording stagnant or declining GDP. This two-year period coincided with special events (severe winter weather in Q4 2010, the Diamond Jubilee in Q2 2012) that are likely to have affected growth. Since 2013, GDP has grown steadily, exceeding its pre-downturn peak in Q3 2013.