GBP/USD at Risk for Rebound on Upbeat 1Q U.K. GDP Report

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

An upward revision in the U.K. 1Q Gross Domestic Product (GDP) print may heighten the appeal of the British Pound and spur a near-term rebound in GBP/USD as signs of a stronger recovery raises the Bank of England’s (BoE) scope to normalize monetary policy sooner rather than later.

What’s Expected:

Why Is This Event Important:

 

A marked uptick in the growth rate may spur a growing dissent within the Monetary Policy Committee (MPC) as the central bank remains on course to normalize monetary policy, and we may see a greater number of BoE officials prepare U.K. households and business for higher borrowing-costs as the economy gets on a firmer footing.

 

Expectations: Bullish Argument/Scenario

Release	Expected	Actual
Construction Output s.a. (YoY) (MAR)	1.1%	1.6%
ILO Unemployment Rate (3M) (MAR)	5.5%	5.5%
Industrial Production (MoM) (MAR)	0.0%	0.5%

The pickup in business outputs along with the ongoing improvement in the labor market may stoke a larger-than-expected upward revision in the growth rate, and a positive development may produce a bullish reaction in the sterling as it boosts interest rate expectations.

Risk: Bearish Argument/Scenario

Release	Expected	Actual
Trade Balance (MAR)	-2.400B	-2.817B
Mortgage Approvals (MAR)	62.5K	61.3K
Retail Sales inc. Auto Fuel (YoY) (MAR)	5.4%	4.2%

However, the widening trade deficit paired with the ongoing slack in private-sector activity may drag on the growth rate, and a dismal GDP figure may further delay the BoE’s normalization cycle especially on the back of the uncertainties clouding the outlook for fiscal policy.

Bullish GBP Trade: U.K. 1Q GDP 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: Growth Rate, Personal Consumption Falls Short of Market Forecast

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

Potential Price Targets For The Release

 GBP/USD Daily

Chart - Created Using FXCM Marketscope 2.0

• GBP/USD remains at risk for further weakness as price & the RSI fail to retain the bullish formation carried over from April; .
• DailyFX Speculative Sentiment Index (SSI) shows the retail crowd remains net-long GBP/USD since May 21, with the ratio currently standing at +1.40.
• Interim Resistance: 1.5550 (61.8% expansion) 1.5570 (38.2% retracement)
• Interim Support: 1.5180 (23.6% retracement) to 1.5190 (50% 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 P 2014	02/26/2015 09:30 GMT	2.7%	2.7%	+3	-123

4Q 2015 U.K. Gross Domestic Product (GDP)

The U.K. Gross Domestic Product (GDP) report was largely in-line with market expectation as the economy grew another annualized 2.7% during the last quarter of 2014. Even though the BoE remains on course to normalize monetary policy, the Bank of England (BoE) may retain its wait-and-see approach throughout 2015 as the ongoing slack in the real economy dampens the outlook for growth and inflation. The initial market reaction in the British Pound was short-lived, with GBPUSD sliding below the 1.5500 handle and ending the day at 1.5402.

DailyFX written by David Song, Currency Analyst and Shuyang Ren
Source:http://www.dailyfx.com/forex/fundamental/daily_briefing/daily_pieces/trading_news_reports/2015/05/27/GBP-USD-at-Risk-for-Rebound-on-Upbeat-1Q-U.K.-GDP-Report.html