Will Friday’s UK GDP Numbers Kick The Pound into Motion?
Eric Furstenberg • 3 min read
Thursday was a quiet day in the currency market, and trading volumes were well below average. The only decent mover amongst the major currency pairs was the USD/JPY which gained about 86 pips on the day. The Thanksgiving holiday in the US was what robbed the market of its liquidity. Friday is a normal trading day again, but much of Thursday’s thin market conditions might get carried over to Friday, however.
This pair has been choppy lately because of the many political and economic factors that influenced it, and are still influencing it. While the Brexit poses various risks to the British economy, the governance of the new US president Mr. Donald Trump softens some of these fears. He is likely to renew or replace former trade agreements between the US and the UK after the Brexit. This was not the intention of the former US president Barack Obama.
UK inflation expectations have risen abruptly as a result of the rapid depreciation of the British pound. This means that the BOE (Bank of England) will have to refrain from interest rate cuts over the near-term, and carefully monitor their monetary policy strategy to avoid overshooting the UK government’s inflation target of 2 percent. Setting the correct interest rate is the preferred method for the BOE to meet this desired inflation target. This means, that if the inflation outlook continues to rise, it might force the BOE to hike rates if necessary. The idea of rate hikes in the UK is outright bullish for the pound. Money follows yield, and a higher interest rate in the UK means that the pound will yield a greater return to those who hold long pound exposure. Here is a daily chart of the GBP/USD:
GBP/USD Daily Chart
As you can see, there has been no clear trend direction in the last couple of days. The long-term trend is bearish, which suggests that perhaps this recent bounce in the exchange rate might be … just a bounce. The picture looks even more bearish if we look at a weekly chart of the GBP/USD:
GBP/USD Weekly Chart
Could we call this recent bounce a trend reversal? Not according to the technicals. Of course, the possibility of a reversal is always present, but we would need some tangible evidence before putting money behind a long-term buy trade. As you can see, the price is currently trading far below the 20-week exponential moving average. This paints the picture of a downtrend which is firmly intact.
The fundamental picture is definitely not as clear as the technical one. Upbeat UK economic data over the past few months have not portrayed the picture of a struggling economy which is about to depart from the European Union. The next important economic data will be released on Friday at 09:30 – the UK GDP numbers. These are preliminary numbers. If these numbers come in better than expected, it could attract some pound buyers. I just don’t think we’ll get a magnificent move of hundreds of pips. On the other hand, a poor reading could weigh on the exchange rate. A strong US dollar would put further pressure on the GBP/USD, and if everything plays out perfectly, this pair could soon revisit its yearly low. A firm close below the 20-day exponential moving average could open up the way to the 1.21500 level. Beyond this level, the yearly low (1.19048) could soon come into play.
Short-term, the pair is still trading sideways and the best way to trade it would probably be to wait for it to break out of this consolidation before initiating new positions.
This pair has gained more than 1000 pips in the last 15 trading days! This aggressive bullish move has been exceptional – not something that we encounter often. This is definitely not the time to short this pair. I wouldn’t be comfortable to open a long-term buy trade either. This recent bullish move is extremely extended, and I would like to see a substantial retracement first before I entered any long-term trades or even swing trades. Scalpers and day traders might still be able to catch a few pips of this bullish move, but make sure to neutralize your risk as soon as you comfortably can, because we could get some sort of a retracement soon.
The only important data to be released on Friday is the UK GDP release as mentioned earlier in this article.