Contrast in U.K. and U.S. fourth-quarter GDP forecasts may pressure sterling


Active Trader
Jan 12, 2010
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The second estimate for the U.K.’s fourth-quarter GDP will be released at 09:30GMT on Friday 26th February and analysts are expecting a slight upward revision from 0.1% to 0.2%. This release will be followed by the preliminary U.S. fourth-quarter GDP data due out at 13:30GMT where the annualised 5.7% rise should be reaffirmed.

Although the preliminary estimate of the U.K. GDP released last month showed that Britain exited its recession, the 0.1% figure was below the consensus forecast of 0.2% and even if this upward revision is confirmed today, the climb back to economic growth for the U.K. growth is definitely not steady and any downside surprise (a flat or slightly negative number is enough to cause this) will rock the sterling further after it fell to a fresh 9-month low of 1.5189 on Thursday. Negative factors affecting the U.K. recently include comments by Monetary Policy Committee members (including Bank of England Governor Mervyn King) who have opened up the possibility of further quantitative easing (after the end of the 200 billion sterling asset purchasing plan) should economic conditions require more fiscal stimulus.

Placed in comparison to the acceleration in growth in the U.S., which recorded growth of 2.2% in the third quarter of 2009, sterling has already fallen over 10% against the dollar since it hit a high of 1.7043 in August and there is talk that the 1.5000 psychological level will be targeted (gbp/jpy could fall to 130.00 if risk aversion increases and props up the yen further). However, the U.S. economy is not without its own problems, especially unemployment (rate is currently 9.8% and sustained overall jobs growth has not yet been achieved) and Fed Chief Bernanke has pledged to keep interest rates low for an extended period of time to support the ‘nascent’ economic recovery.

Position traders should be aware that the sharp fall this month in sterling has put technical indicators in an oversold condition and even if the long term trend remains bearish, moderate corrections lasting several days or weeks may occur before short positions can be considered. An alternative to selling sterling would be to buy euro against the pound (eur/gbp), with more upside potential seen there after the rebound in the cross from the January 28 low of 0.8602.


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