TheNews

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

An upward revision in the U.K. 1Q Gross Domestic Product (GDP) report may heighten the appeal of the British Pound and spur a near-term advance in GBP/USD as it puts increased pressure on the Bank of England (BoE) to normalize monetary policy sooner rather than later.

What’s Expected:



Why Is This Event Important:

Signs of a stronger recovery may spur a growing dissent within the Monetary Policy Committee (MPC) as board member Martin Weale sees scope to raise the benchmark interest rate as early as August, and we may see a growing number of BoE officials adopt a hawkish tone over the coming months should the fundamental developments coming out of the U.K. boost the outlook for growth and inflation.

Expectations: Bullish Argument/Scenario

Release	Expected	Actual
Retail Sales inc. Auto Fuel (MoM) (MAY)	-0.1%	0.2%
Weekly Average Earnings ex. Bonus (3MoY) (APR)	2.5%	2.7%
Industrial Production (MoM) (APR)	0.1%	0.4%

The pickup in private sector consumption along with the expansion in business outputs may generate a strong growth figure, and a marked upward revision may boost interest rate expectations as the BoE remains on course to normalize monetary policy.

Risk: Bearish Argument/Scenario

Release	Expected	Actual
Mortgage Approvals (MAY)	68.8K	64.4K
BBA Loans for House Purchases (MAY)	43.4K	42.5K
Construction Output s.a. (MoM) (APR)	0.1%	-0.8%

However, the slowdown in building activity along with the softening in private-sector credit may lead to a lackluster GDP print, and fears of a slower recovery may drag on the British Pound as it gives the central bank greater scope to retain its wait-and-see approach throughout 2015.

How To Trade This Event Risk
Bullish GBP Trade: U.K. Economy Expands Annualized 2.5% or Greater

• Need to see green, five-minute candle following the GDP report to consider a long trade on GBP/USD.
• If market reaction favors a long sterling trade, buy GBP/USD with two separate position.
• Set stop at the near-by swing low/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.

Bearish GBP Trade: 1Q GDP Falls Short of Market Expectations

• Need red, five-minute candle to favor a short GBP/USD trade.
• Implement same setup as the bullish sterling trade, just in reverse.

Potential Price Targets For The Release
GBPUSD Daily

• After carving a higher-high in June, will retain a constructive outlook for GBP/USD as long as the RSI retains the bullish momentum carried over from back in April.
• Interim Resistance: 1.5929 (June high) to 1.5940 (61.8% expansion)
• Interim Support: 1.5550 (50% retracement) to 1.5570 (38.2% retracement)

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

Period	Data Released	Estimate	Actual	Pips Change (1 Hour post event )	Pips Change (End of Day post event)
4Q F 2014	03/31/2015 08:30 GMT	2.7%	3.0%	+8	+45

The final 4Q U.K. Gross Domestic Product (GDP) report showed an unexpected upward revision in the growth rate, with the economy expanding an annualized 3.0% amid an initial forecast for a 2.7% print. The better-than-expected reading was largely driven by exports, which increased by 4.6% over the last three-months of 2014. Signs of a stronger recovery may encourage the Bank of England (BoE) to adopt a more hawkish tone in 2015, but the committee may continue to endorse a wait-and-see approach over the near to medium-term as the central bank highlights the ongoing slack in the real economy. The initial bullish market reaction was short-lived, with GBP/USD struggling to push above the 1.4800 handle, but the sterling gained ground going into the North American trade, with the pair ending the day at 1.4814.

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

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