GBP/USD- Trading the U.K. 1Q GDP Report

DailyFX

Trading the News: U.K. Gross Domestic Product

What’s Expected:

Time of release: 04/25/2013 8:30 GMT, 4:30 EDT

Primary Pair Impact: GBPUSD

Expected: 0.1%

Previous: -0.3%

DailyFX Forecast: -0.1% to 0.2%

Why Is This Event Important:

The advance GDP report is expected to show the U.K. expanding 0.1% in the first-quarter, and the development may spark a bullish reaction in the British Pound as the region skirts a triple-dip recession. As the Bank of England (BoE) extends the Funding for Lending Scheme, a positive development should further dampen speculation for more quantitative easing, and we may see the Monetary Policy Committee start to discuss a tentative exit strategy later this year as they see a slow but sustainable recovery in Britain.

Recent Economic Developments

The Upside

Release

Expected

Actual

Jobless Claims Change (MAR)

0.0K

-7.0K

Industrial Production (MoM) (FEB)

0.4%

1.0%

Manufacturing Production (MoM) (FEB)

0.4%

0.8%

The Downside

Release

Expected

Actual

Retail Sales ex Auto Fuel (MoM) (MAR)

-0.6%

0.8%

Average Weekly Earnings ex Bonus (3MoY) (FEB)

1.2%

1.0%

Visible Trade Balance (FEB)

-8.600B

-9.416B

The ongoing improvement in the labor market along with the rebound in business outputs may produce a strong GDP figure for the U.K. and a marked rebound in the growth rate should increase the appeal of the British Pound as it dampens the BoE’s scope to expand the balance sheet further. However, the slowdown in private sector consumption paired with the weakening outlook for global trade may drag on the growth rate, and a dismal print may trigger a sharp selloff in the sterling as it fuels bets for additional monetary support. .

Potential Price Targets For The Release

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Forex_GBPUSD-_Trading_the_U.K._1Q_GDP_Report_body_ScreenShot184.png, GBP/USD- Trading the U.K. 1Q GDP Report

We may see the GBPUSD make another run at the 1.5400 figure as the U.K. returns to growth, and the British Pound may continue to retrace the decline from earlier this year as the upward trending channel carried over from the previous month remains intact. However, a dismal GDP print may threaten the bullish setup in the pound-dollar, and the pair may work its way back towards the 61.8% Fibonacci retracement from the 2009 low to high around 1.4840-50 should the growth report fuel bets for more QE.

How To Trade This Event Risk

Trading the given event risk instills a bullish outlook for the sterling as the U.K. economy returns to growth, and an upbeat report may pave the way for a long British Pound trade as market participants scale back bets for more QE. Therefore, if the growth rate expands 0.1% or greater, we will need to see a green, five-minute candle subsequent to the release to generate a buy entry on two-lots of GBPUSD. Once these conditions are fulfilled, we will set the initial stop at the nearby swing low or a reasonable distance for the entry, and this risk will establish our first objective. The second target will be based on discretion, and we will move the stop on the second lot to cost once the first trade hits its mark in an effort to protect out gains.

In contrast, the slowdown in global trade paired with the ongoing slack in private sector activity may drag on the growth rate, and a dismal report is likely to dampen the appeal of the sterling as market participants ramp up bets for additional monetary support. As a result, if the U.K. slips back into recession, we will implement the same strategy for a short pound-dollar trade as the long position laid out above, just in the opposite direction.

Impact that U.K. GDP report has had on USD during the last quarter

Period

Data Released

Estimate

Actual

Pips Change

(1 Hour post event )

Pips Change

(End of Day post event)

4Q A 2012

01/25/2013 9:30 GMT

-0.1%

-0.3%

-40

-14

4Q 2012 Advanced U.K. GDP

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Forex_GBPUSD-_Trading_the_U.K._1Q_GDP_Report_body_ScreenShot183.png, GBP/USD- Trading the U.K. 1Q GDP Report

The U.K. contracted 0.3% during the fourth quarter amid forecasts for a 0.1% decline, and the threat of a triple-dip recession may push the Bank of England to carry out its easing cycle throughout 2013 in an effort to encourage a stronger recovery.

--- Written by David Song, Currency Analyst

To contact David, e-mail dsong@dailyfx.com.

Follow me on Twitter at @DavidJSong

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