The week ahead: Trading the GBP/USD sentiment

The week ahead: Trading the GBP/USD sentiment

By: James Ansher | Where To Trade | On:20-10-2014 07:14
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Key Highlights

  • USD CPI to give clues into Q3 performance
  • UK GDP For the third Quarter
  • Lowe UK GDP anticipated
  • Bearish Sentiments for the USD and GBP 
  • Suggested Sentiment trading for the GBPUSD Pair

 

US CPI expected to soften

On Wednesday, the markets are eagerly waiting to get the official CPI figures from the US. During a recovery, as we are in now, a moderately increasing CPI shows that there is healthy economic activity in the real economy. Such a reading is bullish for the dollar while a lower CPI will add on to the USDX reversal taking place.

As the Markets await the release we can look at past economic indicators in order to be know what to anticipate. Last week on Wednesday, the advance retail sales for the US came overwhelmingly below our expectation.  The advance retail sales had a -0.3% (negative 0.3) reading from the previous month. This shows a reduction in the economic activity which is a good indication of lower CPI.

 

Where To Trade - US CPI

 

The yearly PPI final demand for September, which is a precursor to the monthly CPI also showed a marked reduction at 1.6% down from 1,8% and below the 1.7% expected figure.  Using these already released figures we can with some confidence anticipate that the CPI for September will be well below the previous months 1.7% reading. Under these expectations we should see the USD experience some bearish pressures as the market braces for a below par reading. Should the September figure match the previous reading or be above it, we will see a surge from the USD bulls.

 

Why we should expect the UK’s GDP growth to soften

On Tuesday last week, the UK’s Consumer price index for September was 1.2% reading below the expected 1.4%. The 1.2% inflation rate was well below the previous months reading at 1.5%. This represents a consistent lower inflation rate that the UK has been posting since the since the end of the second quarter of this year. Lowering Inflation rate is an indication of underwhelming economic activity which results in underperformance. This will result in lower GDP growth.

 

Where To Trade - UK GDP Annual 2

 

The NIESR UK’s GDP estimates show’s that we are likely to have a slowdown in growth in the UK for the third quarter. Taking these factors in consideration, we are therefore expecting the GDP reading on Friday to be well below the previous reading of 3.2%. The GBP is likely to have a bearish bias on the run up to the announcement on Friday.

 

Putting it all together

In order to put this information into an actionable trading plan, we must first recognize that for the GBPUSD this is not the most Ideal trading environment. We have two economies both showing less growth and therefore sending a bearish ton to the market. An ideal situation is when the pairs have opposite underlying fundamental outlook. Our luck however is that the releases will be at different days of the week that are well separated.  This gives us two trading setups.

The US CPI figures are released on Wednesday; the bearish sentiment will therefore be in play from Tuesday London’s open. Here we will be looking to go long the GBPUSD. The next trading opportunity will be on Thursday (trading the bearish GBP sentiment). At London’s open we will be looking to go Short the pair as the market corrects from the previ

Key Highlights

  • USD CPI to give clues into Q3 performance
  • UK GDP For the third Quarter
  • Lowe UK GDP anticipated
  • Bearish Sentiments for the USD and GBP 
  • Suggested Sentiment trading for the GBPUSD Pair

 

US CPI expected to soften

On Wednesday, the markets are eagerly waiting to get the official CPI figures from the US. During a recovery, as we are in now, a moderately increasing CPI shows that there is healthy economic activity in the real economy. Such a reading is bullish for the dollar while a lower CPI will add on to the USDX reversal taking place.

As the Markets await the release we can look at past economic indicators in order to be know what to anticipate. Last week on Wednesday, the advance retail sales for the US came overwhelmingly below our expectation.  The advance retail sales had a -0.3% (negative 0.3) reading from the previous month. This shows a reduction in the economic activity which is a good indication of lower CPI.

The yearly PPI final demand for September, which is a precursor to the monthly CPI also showed a marked reduction at 1.6% down from 1,8% and below the 1.7% expected figure.  Using these already released figures we can with some confidence anticipate that the CPI for September will be well below the previous months 1.7% reading. Under these expectations we should see the USD experience some bearish pressures as the market braces for a below par reading. Should the September figure match the previous reading or be above it, we will see a surge from the USD bulls.

 

Why we should expect the UK’s GDP growth to soften

On Tuesday last week, the UK’s Consumer price index for September was 1.2% reading below the expected 1.4%. The 1.2% inflation rate was well below the previous months reading at 1.5%. This represents a consistent lower inflation rate that the UK has been posting since the since the end of the second quarter of this year. Lowering Inflation rate is an indication of underwhelming economic activity which results in underperformance. This will result in lower GDP growth.

 

The NIESR UK’s GDP estimates show’s that we are likely to have a slowdown in growth in the UK for the third quarter. Taking these factors in consideration, we are therefore expecting the GDP reading on Friday to be well below the previous reading of 3.2%. The GBP is likely to have a bearish bias on the run up to the announcement on Friday.

Putting it all together

In order to put this information into an actionable trading plan, we must first recognize that for the GBPUSD this is not the most Ideal trading environment. We have two economies both showing less growth and therefore sending a bearish ton to the market. An ideal situation is when the pairs have opposite underlying fundamental outlook. Our luck however is that the releases will be at different days of the week that are well separated.  This gives us two trading setups.

The US CPI figures are released on Wednesday; the bearish sentiment will therefore be in play from Tuesday London’s open. Here we will be looking to go long the GBPUSD. The next trading opportunity will be on Thursday (trading the bearish GBP sentiment). At London’s open we will be looking to go Short the pair as the market corrects from the previous rally and  as simultaneously the sentiment for the UK GDP growth take on.ous rally and  as simultaneously the sentiment for the UK GDP growth take on.

James Ansher

James Ansher

When there is a will there is a trade

A successful Forex trader and expert advisor

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