The U.K. is next to show its GDP numbers this week! Here are tips and tricks to help you sneak in a couple of pips.
What the heck is a “second estimate?!”
First things first. A country’s gross domestic product (GDP) is its economic report card. 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
The U.K. has three GDP releases for a particular quarter: its preliminary GDP, revised GDP then the final GDP. While the preliminary GDP usually gets the most attention, traders look to the “second estimate” for revisions or confirmation of a particularly notable preliminary release.
What happened to GBP/USD last time?
Back in August the report took the markets by surprise when it was revised to 0.7% from its preliminary 0.6% reading. Details confirmed that all four major sectors of the economy – services, agriculture, construction, and industry – had expanded in Q2 2013 and suggested that further QE is not needed. GBP/USD had popped up by around 80 pips in the first hour of the release but soon encountered profit-taking.
The bulls also struck in November even though the GDP rate stayed at 0.8% as the preliminary reading. What made it special was that the BOE had just upgraded its growth forecasts and the lack of downward revision in Q3 2013 suggested that the BOE might raise rates sooner than later. It was enough to push Cable by at least 100 pips in the first hour of the release.
Forex Tips and Tricks:
1. Consolidation ahead of the report. Based on the charts above GBP/USD tends to consolidate during the Asian session and only show significant movement at the report’s release.
2. The strongest moves are in the first hour of the release. Strike while the iron is hot! Maximize your trade by going with the flow, at least in the first hour after the report is printed.
3. Pay attention to the current GBP sentiment. Cable easily succumbed to profit-taking in August because it had just rallied strongly after the BOE introduced its “forward guidance” program and trading summer trading volume was generally low. This wasn’t the case in November when GBP/USD was on a pretty solid uptrend and the BOE seemed closer to a rate hike after it had just upgraded its own growth forecasts.
4. Lighten positions before the US session open. As we can see above, GBP/USD usually dances to a different beat during the U.S. session. Keep in mind that the U.S. new home sales report is also due tomorrow and could affect Cable’s intraday price action.