Optimism Abound in the U.K.

The U.K. certainly has a lot to be cheerful about these days. Aside from the birth of the royal baby boy, Britons can celebrate positive readings from early growth indicators, which hint at a strong Q2 2013 GDP growth.

Is it time to buy the British pound in anticipation of a strong rally?

Word on the street is that there’s a good chance the economy posted a 0.6% expansion in Q2 2013. In fact, not only do most independent analysts expect to see that kind of growth, but the National Institute of Economic and Social Research itself estimates the same figure.

Some even say that growth could clock in at a staggering 0.8%. One thing market watchers can agree on, however, is that last quarter’s pace of growth will at least surpass the 0.3% expansion in Q1.

Recent economic releases certainly support a strong showing.

For one, Markit’s Purchasing Managers’ Index (PMI) readings all posted solid improvements. In June, the manufacturing PMI climbed from 51.5 to 52.5, besting forecasts for a reading of 51.3. Meanwhile, the services PMI surged from 50.8 to 56.9, blowing right past the consensus forecast of 54.6. Likewise, the construction PMI registered a respectable increase as it rose from 50.8 to 51.0.

But Markit wasn’t the only research firm that noticed these positive results. Lloyds TSB’s consumer sentiment index also noted optimism as it rose to set a new record reading at 112. Similarly, corporate polls showed that dividends paid by companies shot up to an all-time peak of 25.3 billion GBP.

GBP/USD 4-hour

The way I see it, there are three main outcomes. I have listed them down below together with their corresponding possible effects on price action.

Outcome 1: Below 0.6%

A weaker result than Q1 2013’s 0.3% GDP growth would force the U.K. to stick to its cautious rhetoric that the country is still healing and just got out of the ICU. A growth rate between 0.3% and 0.6% would mean that the U.K. is still in recovery mode, but not showing the marked acceleration that U.K. central bank and government officials are looking for. With this outcome, we’ll likely see the 61.8% Fib hold and Cable could fall back down to 1.4800 in the following days.

Outcome 2: From 0.6% to 0.8%

This is the number that analysts expect. A reading of 0.6% means that the U.K.’s economy has considerably picked up, and it is now moving close to its average long-term growth. If it comes out at around 0.8%, which is the upper range of what economists expect, it could strengthen the hawks on the BOE’s MPC and lead them to fear that more economic stimulus would cause inflation to go out of hand.

We probably won’t see a massive rally under this outcome, but it’s reasonable to expect that Cable’s medium-term slow but steady uptrend to be supported.

Outcome 3: Above 0.8%

This is the “too good to be true” outcome. Such an exceptional figure would be the strongest since Q2 2010. Although an unlikely scenario, if it does happen, it could severely boost confidence and permit U.K. officials to declare that the worst is now behind them.

A major change in the U.K.’s fundamentals will confirm that Cable’s downtrend has indeed reversed. We could see Cable rally further and even test the high that was set in June within the next few weeks.