Weak 4Q U.K. GDP Report to Fuel GBPUSD Losses


(MENAFN- DailyFX) - 4Q U.K. GDP to Expand Annualized 1.9%- Slowest Pace Since 1Q 2013.

- Will the Lackluster Recovery Push the BoE to Further Delay the Normalization Cycle?

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

The U.K.’s Gross Domestic Product (GDP) report may heighten the bearish sentiment surround British Pound and fuel the near-term decline in GBP/USD should the data encourage the Bank of England (BoE) to further delay its normalization cycle.

What’s Expected:

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Why Is This Event Important:

Even though BoE officials sees a ‘solid’ recovery in the U.K. and talk down bets for additional monetary support the downside risk surrounding the economic outlook may prompt the Monetary Policy Committee (MPC) to retain its current policy throughout 2016 as the central bank struggles to achieve the 2% target for inflation.

Expectations: Bearish Argument/Scenario

Release

Expected

Actual

Industrial Production (MoM) (DEC)

-0.1%

-1.1%

Manufacturing Production (MoM) (DEC)

0.1%

-0.2%

Net Consumer Credit (DEC)

1.3B

1.2B

Easing outputs accompanied by the slowdown in private-sector credit may drag on the U.K. growth rate and signs of a slowing recovery may push the BoE to retain its current policy throughout 2016 especially as Governor Mark Carney appears to be in no rush to implement higher borrowing-costs.

Risk: Bearish Argument/Scenario

Release

Expected

Actual

Retail Sales ex Auto Fuel (MoM) (JAN)

0.7%

2.3%

Average Weekly Earnings ex. Bonus (3MoY) (DEC)

1.8%

2.0%

Trade Balance (DEC)

-3.000B

-2.709B

Nevertheless increased demand from home and abroad may encourage a stronger-than-expected GDP print and an unexpected upward revision in the growth rate may spur a near-term rebound in GBP/USD as the fundamental outlook for the U.K. improves.

How To Trade This Event Risk(Video)

Bearish GBP Trade: U.K. Expands Annualized 1.9% or Less

Need red five-minute candle following the GDP report 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: GDP Report Beats Market Expectations

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

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Potential Price Targets For The Release

GBPUSD Daily

Chart - Created Using FXCM Marketscope 2.0

Even though the BoE moves away from its easing cycle the long-term outlook for GBP/USD remains tilted to the downside as price & the Relative Strength Index (RSI) retain the bearish formations carried over from the previous year. Interim Resistance: 1.4910 (61.8% retracement) to 1.4930 (38.2% expansion) Interim Support: 1.3870 (78.6% expansion) and 1.4000 pivot

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The DailyFX Speculative Sentiment Index (SSI) shows retail crowd remains net-long GBP/USD since November 19 with positioning hitting an extreme in January as the ratio pushed above +3.00. Retail FX positioning appears to be moving back towards recent extremes as the SSI pushes back to +2.21 with 69% of traders now long.

Why and how do we use the SSI in trading? View our video and download the free indicator here

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)

3Q P 2015

11/27/2015 09:30 GMT

2.3%

2.3%

-10

-27

3Q 2015 U.K. Gross Domestic Product (GDP)

The U.K. 3Q Gross Domestic Product (GDP) report came in line with the expectation with the growth rate increasing an annualized 2.3%. Even though the Bank of England (BoE) sees a ‘solid’ recovery in the U.K. Governor Mark Carney may further delay the normalization cycle as the central bank struggles to bring inflation back towards the 2% target. The initial uptick in GBP/USD was short-lived with the pair consolidating throughout the North American trade to close the at 1.5028.

Read More:

US Dollar – Where the Rubber Meets the Road?

EUR/USD – Bullish Views Getting Put to the Test

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

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