GBPUSD Traders Take a Glass Half Full View of UK GDP

It’s been a generally quiet Tuesday in global markets, with the US dollar regaining some of yesterday’s lost ground, WTI edging higher after hitting a new 4-month low under 47.00, and gold marking time below 1100. The only economic data release of note was the UK’s preliminary GDP reading for Q2, which showed as-expected 0.7% growth quarter-over-quarter.

While the headline GDP reading matched consensus, cable traders are taking a “glass half full” view of the report for a couple of reasons. First, the solid Q2 reading suggests that the Q1 slowdown was driven more by temporary factors than any structural issues with the UK economy; indeed, UK Chancellor of the Exchequer George Osborne noted that Britain’s economy was “motoring ahead” and that the government “must stay on the road [it’s] set out on.” In another feel-good, evening-news-headlinely development, the GDP per capita has now matched its pre-recession peak from Q1 2008. Looking ahead, this solid report strengthens the case for the BOE to hike interest rates early next year, or as some aggressive analysts have suggested, as soon as Q4 of this year.

Market Reaction

Not surprisingly, GBPUSD turned higher in the wake of today’s UK GDP report, bouncing from its intraday low near 1.5525 to trade briefly above 1.5600. From a broader perspective, rates have carved out a clear Morning Star* candlestick formation over the last few days. For the unitiated, this relatively rare 3-candle reversal pattern shows a shift from selling to buying pressure and often marks significant bottoms in the market.

The other technical indicators are a bit more ambiguous, with both the MACD and Slow Stochastics meandering around in neutral territory, but the recent price action still shows buying support around the 1.5500 level. To the topside, the next resistance area to watch is the 1-month high and 61.8% Fibonacci retracement in the 1.5680-1.5700 zone.

While there are no more top-tier data releases from the UK this week, today’s US Consumer Confidence report (14:00 GMT, 10:00 ET), tomorrow’s FOMC meeting and statement (18:00 GMT, 14:00 ET), and Thursday’s US Advance GDP report (12:30 GMT, 8:30 ET) could all serve as key event risks for GBPUSD moving forward.

* A Morning Star candle formation is relatively rare candlestick formation created by a long bearish candle, followed a small-bodied candle near the low of the first candle, and completed by a long-bodied bullish candle. It represents a transition from selling to buying pressure and foreshadows more strength to come.

Source: City Index