The preliminary 1Q GDP reading for the U.K. is expected to reinforce a weakening outlook for the region as economists forecast private consumption and business investments to fall lower from the advanced reading in the previous month, and a downward revision in the growth rate is likely to weigh on the British pound as the Bank of England continues to hold a dovish outlook for future policy.
[U][B]Trading the News: U.K. Gross Domestic Product[/B][/U]
[U][B]What’s Expected
[/B][/U]Time of release: [B]05/22/2009 08:30 GMT, 04:30 EST[/B]
Primary Pair Impact : [B]GBPUSD[/B]
Expected: -1.9%
Previous: -1.9%
[U][B]Effects the U.K. Gross Domestic Product had over GBPUSD for the past 2 quarters[/B][/U]
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[U]4Q 2008 U.K. Gross Domestic Product[/U]
The growth rate in the U.K. fell 1.5% in the fourth quarter to post the largest economic contraction since 1980, which was in-line with the initial estimate from the previous month, while the annualized rate plunged 1.9% from last year, and conditions are likely to get worse as growth prospects deteriorate at a rapid pace. The breakdown of the report showed private consumption slipped 0.7% in the three months through December to mark the biggest decline since 1991, while business investments plunged 2.3% from the third quarter, and policymakers are likely to take further steps to shore up the economy as growth and inflation falter. Accordingly, the Bank of England may utilize unconventional tools to manage monetary policy after lowering the interest rate to a record low of 1.00% earlier this month, and is likely to expand the money supply in an effort to stem the downside risks for growth and inflation.
[U]3Q 2008 U.K. Gross Domestic Product[/U]
The preliminary GDP reading for the U.K. confirmed that the economy contracted 0.5% in the third quarter, led by a 2.4% drop in business investments, which was followed by a 0.2% decline in household spending, while government spending surged 1.0% during the three-months through September. As the downturn in the region intensifies, the Chancellor of the Exchequer, Alistair Darling, pledged to cut taxes and increase spending in an effort to stimulate the ailing economy, while the Bank of England slashed borrowing costs by 150bp to 3.00% earlier this month, which is the lowest level since 1955. Meanwhile, the Organization for Economic Cooperation and Development said interest rates in the industrialized nations should fall lower as economic activity deteriorates, and the BoE may continue to ease policy further in the month ahead as the outlook for growth and inflation falter.
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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:
[U][B]Bullish Scenario:[/B][/U]
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.
[U][B]Bearish Scenario:[/B][/U]
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 preliminary 1Q GDP reading for the U.K. is expected to reinforce a weakening outlook for the region as economists forecast private consumption and business investments to fall lower from the advanced reading in the previous month, and a downward revision in the growth rate is likely to weigh on the British pound as the Bank of England continues to hold a dovish outlook for future policy. The BoE policy meeting minutes showed that the board voted unanimously to hold the benchmark interest rate at the record low of 0.50%, and increase its asset purchase program by GBP 50B to a total of GBP 125B in an effort to steer the economy out of it worst economic downturn in over half a century. However, the MPC went onto say that the central bank may increase the scope of the scheme beyond the GBP 150B allotted by the Chancellor of the Exchequer, Alistair Darling, as they continue to see a risk for price growth to fall below the 2% target. Moreover, board members support the expansion in monetary policy as ‘the risks of stimulating demand too little at the current time seemed greater than the risks of stimulating it too much,’ and the central bank could take further steps to soften the landing of the economy as Governor Mervyn King anticipates economic activity to contract throughout the year. At the same time, Chancellor Darling maintained his growth forecast during an interview with The Times newspaper and expects the economy to start expanding towards the end of the year. On the other hand, as the HM Treasury targets high net-worth individuals who earn GBP100K or more to help finance the strains in the government’s balance sheet, the outlook for future growth remains uncertain as the labor market deteriorates, and the drop in tax revenues could pose a threat to long-term stability. Meanwhile, after cutting the 2009 growth forecast to -4.3% from an initial projection of -2.3, the National Institute of Economic and Social Research (NIESR) said that it would be nearly impossible for the public debt to return to 40% of GDP until 2023, while the European Commission anticipates the deficit to reach ‘close to 85%’ of GDP by 2010/2011 as Mr. Darling plans to borrow GBP 175B this year, and the risks to long-term stability may lead the BoE to take drastic steps in the months ahead as growth and inflation falter.
Trading the given event risk may not be as clear cut as some of our previous traders but nevertheless, an enhanced GDP reading could set the bullish pound trade. Therefore, if the components of the preliminary release hold steady from the advanced reading or if we see an upward revision in the growth figures, a green, five-minute candle subsequent to the release will confirm a sell entry on two-lots of GBP/USD. Once these conditions are met, we will place our initial stop at the nearby swing low, and this risk will determine our first target. The second target will be based on discretion, and we will move the stop on the second lot to breakeven once the first trade reaches its target in an effort to preserve our profits.
In contrast, expectations for a downward revision for business investments and private consumption could lead to a dismal outlook for future growth, and the British pound may face increased selling pressures as investors weigh the outlook for future policy. As a result, a drop in the components would lead us to hold a bearish outlook for the currency, and we will follow the same setup for a short pound-dollar trade as the long position mentioned above.
Gr[B]owth Figures Improve - Stronger Than Expectations
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[B]Further Easing Ahead – [/B][B]Lower Than Expectations[/B]
