The preliminary 2Q GDP reading for the U.K. is expected to reinforce a weakening outlook for the region as economists forecast the growth rate to contract 0.8% from the first quarter, and the slump in private spending may continue to drag on the exchange rate as investors weigh the prospects for a sustainable recovery.
[B][U]Trading the News: U.K. Gross Domestic Product
[/U][/B][B][U]What’s Expected[/U][/B]
Time of release: [B]08/28/2009 08:30 GMT, 04:30 EST[/B]
Primary Pair Impact[B] : GBPUSD[/B]
Expected: -0.8%
Previous: -0.8%[B][U]
[/U][/B]
[B][U]Effects the U.K. Gross Domestic Product had over GBPUSD for the past 2 quarters[/U][/B]
[B]Period[/B]
[B]Data Released[/B]
[B]Estimate[/B]
[B]Actual[/B]
[B]Pips Change[/B]
[B](1 Hour post event )[/B]
[B]Pips Change[/B]
[B](End of Day post event)[/B]
1Q 2009
05/22/2009 08:30 GMT
-1.9%
[B]-1.9%[/B]
+23
+109
4Q 2009
02/25/2009 09:30 GMT
-1.6%
[B]-1.5%[/B]
-89
-358
[U] [/U][U]1Q 2009 U.K. Gross Domestic Product[/U]
The preliminary 1Q GDP reading for the first quarter showed economic activity fell 1.9% from the fourth quarter, which was in-line with expectations, and marked the biggest contraction since 1979 as businesses scaled back stockpiles of unsold goods at a record pace. At the same time, private consumption slumped 1.2% in the first quarter to post the largest decline since 1980, while business investments slipped 3.8% during the first three-months of the year, and the outlook for future growth remains weak as private-sector spending falters. Moreover, Standard & Poor’s saw a risk of the U.K. losing its AAA credit rating for the first time as the government takes unprecedented steps to stimulate the ailing economy however, the Bank of England may continue to ease policy further in the months ahead as the outlook for growth and inflation falters.
[U]
[/U][U][U]4Q 2008 U.K. Gross Domestic Product
[/U][/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.
[B]
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]
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 preliminary 2Q GDP reading for the U.K. is expected to reinforce a weakening outlook for the region as economists forecast the growth rate to contract 0.8% from the first quarter, and the slump in private spending may continue to drag on the exchange rate as investors weigh the prospects for a sustainable recovery. A report by the Office for National Statistics showed business investments plunged 10.4% in the second-quarter to mark the biggest decline since 2005, while consumer credit unexpectedly slipped to 0.1B from a revised reading of 0.2B in May, and the data foreshadows a dour outlook for private-sector consumption, which is one of the biggest drivers of growth, as banks remain reluctant to lend. At the same time, the Confederation of British Industry’s retail sales survey weakened in August, while a report by the Bank of England showed home equity withdrawals tumbled at a record pace during the first quarter, and households and businesses may continue to scale back on spending as they face a weakening labor market paired with tightening credit conditions. Nevertheless, the National Institute of Economic and Social Research said economic activity declined at a slower pace during the three-months though July, with the International Monetary Fund raising its 2010 growth projection to 0.2% from an initial forecast of -0.4%, and the rebound in consumer confidence encourages an improved outlook for future growth as policy makers take unprecedented steps to stimulate the ailing economy. The Bank of England held the benchmark interest rate at 0.50% earlier this month and unexpectedly expanded its asset purchase scheme by GBP 50B to GBP175B in order to maintain its 2% target for price growth however, the minutes of the meeting showed the MPC voted 6-3 to expand the program, with Governor Mervyn King, Timothy Besley and David Miles pushing for a GBP 75B expansion to GBP 200B in an effort to support a sustainable recovery. As the central bank head maintains a dovish outlook for inflation and sees a risk for a slower recovery, a dismal GDP reading is likely to weigh on the exchange rate as investors scale back long-term expectations for higher borrowing costs, and the drop in the interest rate outlook may lead the British pound to retrace the advance from the March low as the outlook for growth and inflation remains weak.
Expectations for a dismal growth reading favors a bearish outlook for Cable but nevertheless, the expected upward revisions in private consumption and business investments has left the door open of an enhanced GDP report. Therefore, if the growth rate unexpectedly falls at a slower pace than expected (-0.8%), we will look for a green, five-minute candle following the release to confirm a buy entry on two-lots of GBP/USD. Once these conditions are met, we will place our initial stop at the nearby swing low (or reasonable distance), and this risk will establish our first target. Our 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 order to preserve our profits.
On the other hand, the drop in business investments paired with the rise in unemployment is likely to weigh on economic activity going forward, and a dismal GDP reading is likely to reinforce fears of a slower recovery as private-sector spending falters. As a result, if the growth rate falls 0.8% or greater in the second quarter, we will favor a bearish outlook for Cable, and will follow the same strategy for a short pound-dollar trade as the long position mentioned above, just in reverse.
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