The UK publishes its first estimate for GDP growth on Wednesday, October 25th at 8:30 GMT. There are good reasons to believe it will trigger high volatility, and there is room for a surprise to the downside. Here is a preview for the event with GBP/USD.
The British economy grew by a very stable yet not-so-strong rate of 0.3% in Q2 and also in Q1 2017. Expectations for Q3 are for a repetition of the same slow growth rate. When expectations are so tight, any surprise can trigger volatility, especially as the pound is one of the more volatile currency pairs out there.
Another obvious reason for expecting action is that this is the first release out of three, and revisions are not that huge in the UK. A third reason to expect a big reaction stems from the timing: a week before the all-important BOE meeting in which Mark Carney and co. are likely to hike interest rates.
Or are they? John Cunliffe, a member of the MPC, was not so sure about the timing of the rate hike. Perhaps more importantly regarding the GDP release, Cunliffe noted that the “growth has clearly slowed”. This can be read as reading past GDP releases: 2016 saw growth rates of around 0.6% q/q and 2017 only 0.3%.
But it could also be a hint about the upcoming publication. Did he give us a hint about a lower growth rate? Pessimism about the economy does not come only from this member. Governor Mark Carney also seemed hesitant about raising rates. And recent economic data has been mixed, with a big disappointment from retail sales.
GDP Scenarios with GBP/USD
All in all, there seems to be more room to the downside than to the upside. A growth rate of 0.2% may be enough to send the pound lower. It is already vulnerable due to deadlocked Brexit talks. A level of 0.1% could be more painful and no growth already a big blow. A negative growth rate seems unlikely and will clearly be a big shocker.
In case we meet expectations at 0.3%, the reaction may depend on potential revisions to previous releases and the composition of the GDP. Yet given the negative bias, it is hard to see how the pound can advance. It will probably wobble and remain unchanged after a few turbulent hours.
In case we get an upside surprise, something that cannot be ruled out, the pound could jump. The reaction to an upside surprise of 0.4% could be weaker than the reaction to a downside surprise of 0.2%, but any good news does impact sensitive Sterling.
GBP/USD Levels to watch
Looking from the top, 1.3370 is a strong level of resistance after providing support in September. It is followed by 1.3270 as a weak cap and more importantly by 1.3230.
Further below, we find 1.3150 as a pivotal line and then 1.3080 which was a swing low. The cycle low of 1.3030 is the last line of support before the round number of 1.30.
More: Merkel provides some help to May – Sell opportunity on GBP/USD?
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