UK GDP: The One Thing You Must Know

Jarratt Davis

Special Consultant to the FPA
In this report we will discuss the one thing you need to know if you plan on trading UK GDP on Friday, August 10. We will also take a look at any other market-moving risk events which are due this week.

Last week, the market's focus turned back to US/China trade wars as the US threatened to impose further tariffs on China. According to The Financial Times, Trump asked advisors to consider raising tariffs on $200bln of Chinese goods to 25% from 10%.

ING expects trade wars to remain in focus for the week ahead which they believe will be supportive for USD.

Of course, trade wars won't be the only focus with both the RBA and RBNZ announcing their latest policy decisions this week. Furthermore, we will see UK GDP, Canadian employment and US inflation data.

Tuesday, August 7
RBA Monetary Policy Decision - AUD
The first opportunity of the week will be from the RBA's August monetary policy decision.

At this meeting, the market expects the RBA to leave policy unchanged with the Cash Rate remaining at 1.50%. According to ASX futures, the market is pricing in a 0% chance of an interest rate increase at this meeting.

With the market widely expecting the RBA to remain on hold, the focus for this meeting will be on the accompanying statement. According to ING, uncertainties surrounding global trade and China's economy will dominate the agenda.

Westpac, however, notes that the more interesting development this week will likely be the RBA's Statement on Monetary Policy. Therefore, any clear bias from the RBA could guide AUD sentiment leading into the RBA's Statement on Monetary Policy on August 10.

If the RBA provides a hawkish tone, we would expect AUD to remain well supported. However, if the RBA provides a dovish tone, we would expect AUD to weaken.

Of course, due to the influence China has on Australia’s economy and hence AUD, it's imperative that you also consider any further trade war developments too.

If trade wars do remain in focus this week, they will likely overshadow the RBA. This will likely prove to be AUD negative.

Wednesday, August 8
RBNZ Monetary Policy Decision - NZD
The RBNZ's August meeting will see their latest policy decision and the release of their quarterly policy statement.

Regarding their policy decision, market expectations are for the Official Cash Rate to remain unchanged at 1.75%.

Regarding their quarterly released policy statement, ANZ expects little change from May's release. They believe this will continue to signal a rate increase by the end of 2019 along with chances of a rate cut looking less likely.

If the RBNZ shift from their current neutral tone and become more hawkish, the market may bring forward its rate hike expectations. This should support NZD, presenting a NZD long opportunity.

Conversely, if the RBNZ shift to a more dovish stance, the market will likely push rate hike expectations further back. This will likely weigh on NZD, presenting an opportunity to go short.

Friday, August 10
RBA Monetary Policy Statement - AUD
As discussed above, the market will likely trade into the RBA's Statement on Monetary Policy from their earlier released policy decision on August 7.

The RBA's Statement on Monetary Policy will provide the market with a greater insight into the RBA's future expectations.

Westpac expects the RBA to retain their upbeat forecasts for GDP and see no reason for the RBA to revise inflation either.

Regarding employment, Westpac is looking for an extension in the Unemployment Rate to December 2020 at 5.25%. However, they note that Australia's 2019 election could pose a serious risk to the RBA's forecasts.

As GDP, CPI and employment forecasts are likely to remain little changed; any significant revisions could be market moving.

Upward revisions to GDP and CPI forecasts or a downward revision to Unemployment Rate expectations should be AUD positive. Conversely, downward revisions to GDP and CPI forecasts or upward revision in the Unemployment Rate should be AUD negative.

Once again, it's important to consider trade war developments when evaluating AUD sentiment.

UK Gross Domestic Product - GBP
The UK’s GDP release will consist of the preliminary estimate for Q2 and the new monthly GDP release for June.

However, there is one important factor to consider when trading UK GDP. Above all else, Brexit developments will be key to GBP sentiment and its fundamental outlook.

This became clear last week when GBP weakened due to Brexit comments despite a BoE surprise vote split of 9-0-0 and an overall upbeat tone.

With the Brexit deadline less than eight months away and progress remaining stubbornly slow, Brexit will become an increasing concern for the outlook of GBP.

For this reason, we expect Brexit developments to overshadow UK data and the UK's monetary policy outlook going forward.

If Brexit developments prove positive, GBP should remain overall well supported. Conversely, if Brexit developments are negative or the outlook remains bleak, GBP will likely remain pressured.

For this reason, when trading UK data, always determine whether the outlook for Brexit is supportive of the sentiment bias or not.

If Brexit remains bleak, we would have more conviction in a GBP short on disappointing UK GDP data. However, if Brexit sentiment turns positive and GDP beats expectations, a GBP long could be a great trade.

Canadian Employment - CAD
Canada’s employment report consists of two releases, the Unemployment Rate and Employment Change.

Of the two data points, the initial reaction will likely come from Employment Change. This is because Employment Change tends to deviate quite significantly from expectations.

Furthermore, we can evaluate Employment Change in greater detail due to the Full-Time component. This means the report can be misleading if Full-Time contrasts with the headline.

For this reason, any deviation in Employment Change should be a result of Full-Time Employment. If a deviation results from Part-Time Employment, the market's reaction will be less clear.

Finally, the market will turn to the Unemployment Rate. A significant deviation could prove market-moving, especially if it too supports a deviation in Employment Change.

Scotiabank is looking for Employment Change to print at +20K and the Unemployment Rate to fall to 5.9%. This is slightly above consensus with the market expecting Employment Change to print at 17.5K.

US Consumer Price Index - USD
Alongside Canada's employment report, we will see the release of US CPI for July.

Once again, the market is expecting another tick higher in US inflation with CPI Y/Y expected to rise to 3.0%. If CPI Y/Y does rise to 3.0%, it will be at its highest level since December 2011.

Regarding Core CPI Y/Y and Core CPI M/M, the market expects another print of 2.3% and 0.2% respectively. However, the market does expect CPI M/M to increase to 0.2% from 0.1% prior.

As inflation remains the primary focus for the outlook of monetary policy, any deviation will likely prove market moving. A positive deviation should see USD strengthen and a negative deviation see USD weaken.

Of course, a single data point is unlikely to influence the Fed's rate hike path too much. Therefore, although a deviation could influence USD sentiment, we expect the fundamental outlook to remain bullish regardless of the data.

Although we have discussed numerous risk events in this article, the key takeaway should be the influence external factors continue to have on many currency pairs.

The clearest of these is the increasing influence of Brexit on GBP as it overshadows economic data and monetary policy. For this reason, it's crucial to evaluate any Brexit sentiment on GBP before trading UK GDP on August 10.

Beyond Brexit and GBP, it's also wise to consider NAFTA developments when trading CAD and trade war developments when trading AUD and USD.

The goal of this report is to help you improve your understanding and ability to trade risk events.
If you would like to learn more about risk event trading, please type your question in the comments below.


Hi Jarrat,

Thank you for this week fundamental analysis summary.
I am a pure price action technical trader so far and I will try to fill it with fundamental insights as per your suggestion.

Kind regards,