Trading the U.K. Q2 Preliminary GDP Report

Heads up! The U.K. GDP release is coming up this week so y’all better read up on what analysts are expecting and how GBP/USD could react.

What the heck is the U.K. Preliminary GDP all about?!

GDP, which stands for gross domestic product, is the measure of economic activity in a country. It takes into account the total value of goods and services produced in an economy through this formula:

GDP = consumer spending + investment (by businesses) + government spending + net exports

Traders pay close attention to a country’s GDP because it acts as the report card of an economy. A positive reading indicates economic expansion, which is good for the country’s currency, while a negative reading denotes a contraction and is usually bad for the country’s currency.

The U.K. has three GDP releases for a particular quarter: its preliminary GDP, followed by the revised GDP then the final GDP. The preliminary GDP, which is also called the initial GDP estimate, tends to have the strongest impact on price action because it offers the very first glimpse into the U.K. economy’s performance for the period.

What can we expect from the U.K. Q2 preliminary GDP release?

The U.K. preliminary GDP figure for Q2 2012 is set for release on July 25 (Wednesday) at 8:30 am GMT. Recall that the previous quarter’s figure showed a 0.3% contraction, following the -0.4% reading for the last quarter of 2012. These two consecutive negative quarterly GDP readings signalled that the U.K. was in a technical recession.

For Q2 2012, economic activity in the U.K. is expected to dip by 0.2%. Although the estimated contraction is smaller compared to the past two quarters, it would still place the U.K. deeper in their double-dip recession.

Among the reasons supporting another decline in U.K. economic activity are the tight fiscal policies in the nation, ongoing debt troubles in the euro zone, and the extra public holidays in June. After all, the Brits did take a few days off work to celebrate the Queen’s Jubilee last month.

How do I trade this month’s GDP release?

We don’t know exactly how traders will react the report this time around, but maybe GBP/USD’s price action over the last two releases can help us see a pattern.

Last January GBP/USD traded on a tight range during the Asian session. Thanks to market speculations though, price had already broken down by 75 pips an hour before the report is even printed. This is probably why we saw a 50-pip rally despite the worse-than-expected GDP reading. The pair traded on a 50-pip range before a dovish FOMC statement pushed the pair to close at new intraday highs.

Q4 2011 UK GDP

In April the pair also traded on a tight range during the Asian session, but this time it showed a false break to the upside before the report dragged it by 45 pips in the first 15 minutes. Like in January, the pair found support at a psychological handle near the open price before a dovish FOMC statement boosted the pair to close at new intraday highs.

Q1 2012 UK GDP

On Wednesday we’ll most likely see another tight consolidation on Cable just before the report is released. But if you’re planning to trade a breakout, you have to remember two things.

First, analysts are already predicting another contraction for Q2. Unless the GDP report prints way worse than the expected 0.2% dip, then the pair might not move as strongly as it had in the past releases.

Another thing you have to remember is that there won’t be an FOMC statement during the U.S. session this time. The Fed has already done its magic on the high-yielding currencies last week, so there might not be enough catalyst for Cable to close near its intraday highs as it had done in the past two releases.

Still, the U.K.’s GDP report still presents a good news trading opportunity as it is one of the few major reports that we have this week. Just remember to be careful of slippages and to avoid revenge trading!

Good luck trading the U.K. GDP, forex fanatics!