Tomorrow at 8:30 am GMT we’ll finally see some real action in the charts as the U.K. releases its GDP report for the first quarter of 2011.
Recall that last January the data gave pound bulls heart attacks when it showed that the U.K. economy contracted by 0.5% in the fourth quarter instead of growing by 0.5% as analysts had estimated. That’s a pretty steep plunge from the third quarter’s 0.7% upsurge!
After the dust had settled following the hoopla, I found out that the weather was to blame (again) for the weak report.
Apparently, snowfall in the region stalled construction projects, delayed large shipments, and even caused the cancellation of a few egg nog-filled Christmas parties.
In fact, the Office of National Statistics (ONS) even projected that bad weather cut at least 0.5% of total output during the period!
This time around, market junkies are expecting the U.K.’s economic growth to clock in at around 0.5% for the first quarter as economic activity kicks in full gear.
Sadly, even if the data meets expectations, many believe that it won’t be enough to convince the BOE doves to change their stance on interest rates. At the very least, the BOE members will wait for more economic data before they reconsider their positions.
You see, analysts think that a 0.5% growth will only reflect the economic activity of lost transactions in the fourth quarter and that it will be enough to signal underlying growth.
They believe that we need to see a growth higher than 1% before we can safely assume that economic growth is back on track.
The GDP report’s impact on GBP/USD
On the technical side of the report, let’s see how Cable reacted to the GDP release in the last two instances to give us a better insight as to how the upcoming GDP will affect price action.
On October 26, 2010, the GDP report came in surprisingly above expectations. It printed a 0.8% increase, twice the 0.4% gain the market initially expected.
As a result, Cable popped up by almost 100 pips. This makes sense, as positive data is usually positive for the domestic currency.
Then, on January 25, 2011, the GDP disappointed as it showed a 0.5% fall, opposite the consensus of a 0.5% increase.
As you can see, Cable dropped immediately dropped by 150 pips at the release of the report. Once again, the resulting move was completely rational.
What can we take away from this?
From the past two instances, it’s pretty clear that Cable has a positive correlation with the actual results. If the figure surprises to the upside (i.e., beats forecast), Cable has a huge chance of rallying. On the other hand, if the actual number disappoints, then Cable will most probably fall.
Also, Cable moved around 100 to 150 pips in one-direction both times. We could see the same in the upcoming report. For example, if the GDP report comes in better than expected, and Cable has only rallied 30 pips, then there is sufficient reason to expect another 70 pips.