UK GDP Still weak - Will Pound Hold Its Gains?

Last updated 11/25/2009 5:10 AM ET (GMT -5) 0 Comments - Add your comment

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Boris Schlossberg

Director of Currency Research, GFT

UK GDP data for Q3 was revised upward from -0.4% to -0.3% which was an improvement from the shockingly low figure the market saw originally but a disappointment to cable bulls who were hoping for a stronger reading this time. The breakdown showed that private consumption was flat, government spending rose 0.2%, investment declined -0.3% while imports increased 1.3% contributing strongly to the contraction as exports increased only 0.5% widening the trade gap.

Over the past month UK data has been surprisingly resilient with Service and Manufacturing PMI readings well above the 50 boom/bust level leading some market players to conclude that the initial GDP results were innacurate. However the second revision on the data confirms that the UK economy continues to contract despite some signs of a pick up in economic activity.

BoE Governor Mervyn King has consistently reiterated the notion that the market should focus on the level of activity rather than the rate of growth and FX traders may indeed take his advice given the fact that GDP data is backward looking. Nevertheless today’s release is a clear disappointment to pound longs who anticipated stronger evidence of growth. UK remains one of the last industrialized nations with a contracting GDP and while forward looking indicators suggest a rebound in Q4, traders may be more cautious in their assessment given today’s results.

GBP/USD ran through the 1.6700 handle in anticipation of a stronger revision but has since given up the figure as profit taking and consolidation kicks in. The near term momentum still favors the upside especially if anti-dollar sentiment continues for the rest of the day. On a broader horizon however, the 1.7000 area remains a cement ceiling for the pair and today’s release will do little to help the bull case for now. Furthermore, if the next batch UK economic statistics begins to disappoint, it could confirm the bear argument that for the time being UK recovery remains elusive and pound weakness will return with a vengeance as markets begin to consider the possibility of more stimulus and QE.

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About The Author

Boris Schlossberg began his Wall Street trading career more than 20 years ago at Drexel Burhnam Lambert. There, he traded nearly every type of financial product on the market in the U.S., from equities and options to stock index futures and foreign exchange. His innate ability to analyze market information and use it to trade has helped him become an industry-recognized, “go to” trading professional.

These days, whenever the markets move, many organizations turn to Schlossberg for his take on the situation. He is a weekly contributor to CNBC's Squawk Box and a regular commentator for Bloomberg radio and television. His daily currency research is widely quoted by Reuters, Dow Jones and Agence France Presse newswires and appears in numerous newspapers worldwide. Schlossberg has written for publications like SFO magazine, Active Trader and Technical Analysis of Stocks and Commodities. He is also the author of Technical Analysis of the Currency Market and the co-author of Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game with Kathy Lien. He joined GFT in 2008.