Sterling's Hopes Tied to 3rd Q GDP

By FX Empire Analyst - Barry Norman
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Sterling's Hopes Tied to 3rd Q GDP

Sterling's Hopes Tied to 3rd Q GDP

The main event that sterling traders have eagerly been waiting 3rd quarter GDP numbers,  are expected tomorrow. Analysts are forecasting improved numbers, which will show expansion in the UK and pull Britain out of its current technical recession.

Yesterday after the close of the European markets, BoE’s King in a speech said that the BoE is still ready to inject more cash in the economy if recent positive signs fade. At the same time, he kept a more neutral tone than was already visible in recent communication as he said that the BoE will “think long and hard” before it decides whether or not to make further asset purchases. It sounds as if more QE is not a done thing yet. Nevertheless, the headlines from the speech had no negative impact on the EUR/GBP cross rate. Mortgage approvals have come in better than expected, suggesting that the FLS is providing support to lending markets, and leaving market participants more confident with a view that the BoE remains on hold.

None the less, the GBP/USD fell below the 1.60 level yesterday. The EUR/GBP returned to its usual trading pattern in case of a setback in global sentiment on risk. Cable outperformed the decline of EUR/USD, pushing EUR/GBP off Monday’s top.

Global sentiment on risk and the EUR/USD performance continued to set the tone for EUR/GBP trading. The pair reached a correction low at 0.8124, leaving Monday’s correction low of 0.8123 intact. From there, EUR/GBP reversed part of the earlier losses. So, in the end, the gains of sterling against the euro were still limited. Although the euro was weakened by negative comments from Moody's as it downgraded several Spanish regions. Also a report was printed saying the Spain would not meet its 2012 budget and growth would be well under current forecast. This weighed heavily in the EUR.

The pair closed the session at 0.8140, compared to 0.8155 on Monday evening.

Today, the CBI industrial trends orders will be released. A further moderate improvement is expected. We don’t have any reason to distance ourselves from consensus. However, we still are keen the see the market reaction in case of decent UK eco data.

The EUR/GBP will still be affected by the overall sentiment on risk and by the performance of the headline EUR/USD pair, with strong resistance ahead. In a day-to-day perspective, don’t anticipate/preposition for a big leap higher.

A few months back the commitment of ECB’s Draghi, to do whatever is needed to protect the single currency, triggered a U-turn in EUR/GBP with the pair setting a top at 0.8115 mid-September. The price action in both EUR/USD and cable is for an important part driven by global sentiment on risk. In a risk-on context, EUR/USD tends to outperform cable, thus supporting EUR/GBP. As the risk-on rally ran into resistance mid September, the balance between EUR/USD and cable changed temporary, pushing EUR/GBP into a correction (low at 0.7923). A new rally developed last week and EUR/USD took out the 0.8114 top. The cross rate remains constructive and a break above the 0.8169/0.8222 resistance might be on the cards in case the ECB starts buying bonds under OMT. 

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