Trading the U.K.’s Q4 2012 GDP Report

What is the preliminary GDP report?

For those of you who’ve gone through Economics 101, you’d know that GDP stands for Gross Domestic Product. GDP measures the total value of goods and services produced in an economy. The basic formula is

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

When you add all those up, you get a number which represents how good (or bad) the economy performed over a certain period. Normally, analysts like to look at this figure in relative terms. This means that they like to compare GDP figures quarter-on-quarter or year-on-year, to see if the economy is growing or not.

The U.K. government releases three versions of the GDP report: the preliminary GDP, which is then followed by the revised GDP, and then finally, the final GDP.

It’s the preliminary GDP that garners the most attention though, since it tends to have the strongest impact on price action since it offers the first look at how the British economy performed over the period.

What can we expect from this week’s release?

This month’s report is scheduled for release at 9:30 am GMT this Friday, January 25, 2013.Early estimates by the National Institute of Economic and Social Research (NSIER) are calling for a 0.3% contraction for the U.K. during Q4 2012.

See, retail sales dropped in December by 0.1%, while industrial production slowed down by 0.3% in November. Meanwhile, the construction PMI came in worse than expected at 48.7 earlier this month, indicating continued contraction in that industry.

How can I trade the report?

We have a better chance at predicting the next American Idol winner than predicting the pound’s reaction to the report, so let’s just make history speak for itself. More specifically, let’s take a look at how GBP/USD reacted for the past two releases.

GBP/USD October Chart
July 25, 2012: U.K.’s GDP was weaker-than-expected

GBP/USD broke out of its Asian session range and climbed 50 pips a couple of hours before the report. The weak GDP reading caught traders by surprise as Cable fell by 75 pips. The pair recovered more than half of its losses in the next 15-minute candle though, before it made new intraday lows by the early U.S. session.

GBP/USD October Chart

October 25, 2012: U.K.’s GDP was stronger-than-expected

Once again, GBP/USD broke up from its Asian session range before the report was printed. Unlike July’s release though, the pair spiked higher by 60 pips when the GDP report came out. Also, unlike the price action in July, the pair barely retraced before it made new intraday highs during the early U.S. session.

Based on the last two GDP releases, we have learned that Cable tends to break up from its Asian session ranges before the report is released. We also know that the pair’s initial price action was directly correlated with the report. That is, a strong reading boosted the pair while a weaker-than-expected reading dragged it lower. Last but not least, we saw that the pair could make new intraday highs/lows during the late U.K. or early U.S. session.

A few words of caution though. Remember that we have only looked at TWO GDP releases, two possible scenarios. There are plenty more ways that the pound could react depending to the report. Also take note that the MPC meeting minutes released a few hours ago could still impact the pound’s price action.

Still, a solid trading plan and strong self-discipline would increase your chance at successfully trading the odds explored above. Just remember to read and prepare well, and then concentrate on your execution.