The advanced GDP reading for the U.K. is expected to reinforce fears of a deepening downturn in the region as economists forecast the growth rate to fall 1.5% in the first quarter, and conditions are likely to get worse as the HM Treasury forecasts the economy to contract 3.5% this year.
[B][U]Trading the News: U.K. Gross Domestic Product[/U][/B][B][/B]
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What’s Expected[/U][/B]
Time of release: [B]04/24/2009 08:30 GMT, 04:30 EST[/B]
Primary Pair Impact[B] : GBPUSD[/B]
Expected: -1.5%
Previous: -1.6%[B][/B]
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Effects the [/B][/U][U][B]U.K.[/B][/U][U][B] Gross Domestic Product had over GBPUSD for the past 2 months[/B][/U]
[U]4Q 2008 U.K. Gross Domestic Product[/U]
The growth rate in the U.K. fell 1.5% in the fourth quarter to mark the biggest economic contraction since 1980, and the region is likely to face a deepening downturn in 2009 as the financial crisis continues to take a toll on the economy. The breakdown of the report showed that service-based activity slid 1.0% from the third quarter, while manufacturing plunged 4.6%, followed by a 1.1% drop in construction. As the region is expected to face its worst recession in over half a century, the BoE is widely expected to ease policy further even as the overnight rate remains at a record-low of 1.50%, and may employ tools beyond the interest rate as the outlook for growth and inflation falter. However, Governor King stated that he expects ‘a pronounced contraction in spending and outputs’ as the fundamental outlook deteriorates, and said that ‘the rate of contraction is likely to continue to be marked,’ during the first half of 2009.
[U]3Q 2008 [/U][U]U.K.[/U][U] Gross Domestic Product[/U]
The advanced GDP reading for the U.K. showed that the economy contracted 0.5% in the third quarter, and conditions are likely to get worse as Great Britain heads into a recession for the first time since 1991. Falling home prices paired with instability in the global financial market has certainly taken a toll on Europe’s second largest economy, which could force policy makers to step up their efforts over the coming months as growth prospects deteriorate at a rapid pace. Meanwhile, Bank of England Governor Mervyn King stated that the ‘economy is entering a recession,’ and went onto say that the policy makers will move ‘promptly’ to in order to meet the central bank’s dual mandate to ensure price stability while fostering economic growth. As a result, market participants expect the BoE to ease policy further over the coming months, and which is likely to drag on the British pound going forward.
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What To Look For Before The Release[/B]
Traders with access to market depth information via the FXCM Active Trader Platform may use it to gauge the potency of the economic data release as well as to shed some light on the market’s directional bias. Increasing volume ahead of the announcement will telegraph likely follow-through behind whatever move is to materialize, while an imbalance in available liquidity on the Bid versus the Offer side of the market will tell us the direction major institutions are likely favoring ahead of the announcement:
[B][U]Bullish Scenario:[/U][/B]
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If we see substantially deeper available liquidity on the Bid side of the market, this tells us that major price providers in the market are looking to buy the GBP against the US Dollar. Considering that close to 60% of all FX market volume is cleared through just six top banks, we see it prudent to be on the same side of the trade as major institutions and will favor a bullish bias on GBPUSD ahead of the data release.
[B][U]Bearish Scenario:[/U][/B]
If we see substantially deeper available liquidity on the Offer side of the market, this tells us that major price providers in the market are looking to sell the GBP against the US Dollar. Considering that close to 60% of all FX market volume is cleared through just six top banks, we see it prudent to be on the same side of the trade as major institutions and will favor a bearish bias on GBPUSD ahead of the data release.
[B]How To Trade This Event Risk[/B]
The advanced GDP reading for the U.K. is expected to reinforce fears of a deepening downturn in the region as economists forecast the growth rate to fall 1.5% in the first quarter, and conditions are likely to get worse as the HM Treasury forecasts the economy to contract 3.5% this year. The Chancellor of the Exchequer, Alistair Darling, lowered his growth projections for 2009 during the budget statement earlier this week, but continued to insist that economic activity will improve later this year and predicts the annual growth rate will expand 1.25% next year as policymakers continue to take additional steps to shore up the economy. Despite the improved outlook held by the Treasury, the International Monetary Fund continued to hold a weakening outlook for global growth as they anticipate economic activity in the U.K. to fall 4.1% this year and 0.4% in 2010, while the OECD projects GDP to fall 4.0% in 2009, and the downward revision in the growth forecasts suggests that conditions will only get worse throughout the year as the downturn in the world economy intensifies. Moreover, Bank of England dove David Blanchflower, who warned of a recession since late 2007, wrote in an article for the Guardian that there have been some encouraging signs for a recovery while noting that ‘all of these various indicators still remain at very low levels,’ and went onto say that the region is ‘still deep in recession.’ In addition, Mr. Blanchflower warned that these early signs could prove to be a ‘false dawn,’ and stated that ‘the worst is far from over for ordinary working people’ as the labor market deteriorates at a record pace. A report by the Office for National Statistics showed that first-time claims for unemployment benefits increased73.7K to 1.46M in March, which raised the claimant count rate to 4.5% from 4.3% in the previous month, while a separate report by the International Labor Organization showed that the firm’s jobless rate increased 177K in the three-months through February to 2.1M, which is the highest level of unemployment in 12 years. Meanwhile, as the Bank of England expects economic activity in the first quarter to fall at ‘a similar rate’ that we’ve seen in the fourth quarter and anticipates price growth ‘to fall below the target by the second half of the year,’ the dour outlook held by the central bank continues to foreshadow a weakening outlook for growth and inflation, and as the growth rate is expected to fall further, fears of a deepening recession is likely to weigh on the exchange rate as growth prospects deteriorate but nevertheless, as risk trends continue to dictate price action in the currency market, long-term expectations for higher interest rates paired with a rise in market sentiment could boost demands for the British pound .
Expectations for a 1.6% drop in GDP favors a bearish outlook for the British pound however, an if the growth report crosses the wires stronger than expected while investors continue to hold long-term forecasts for higher interest rates, price action following the event could set the stage for a long pound trade. Therefore, if the growth rate falls 1.2% or less in the first quarter, we will look for a green, five-minute candle following the release to confirm a buy entry on two-lots of GBP/USD, and once these conditions are met, we will place our initial stop at the nearby swing low (or reasonable distance taking volatility into account), and this risk will establish our first target. Our second target will be based on discretion, and in order to preserve our profits, we will move the stop on the second lot to breakeven once the first trade reaches its target
On the other hand, fading demands from home and abroad paired with the jump in unemployment is likely to drag have dragged on economic activity throughout the first quarter, and as policymakers continue to hold a dour outlook for growth and inflation, a dismal GDP reading is likely to weigh on the exchange rate as the region faces a deepening recession. As a result, an in-line print or a drop of more than 1.6% in the growth rate would lead us to sell Cable, and we will follow the same strategy for a short pound-dollar trade as the long position mentioned above, just in reverse.
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