UK GDP Revision and the EUR/GBP

By FX Empire Analyst - Barry Norman
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Today's big event is the UK GDP revision which is the key release for the week, and the anticipation of an improvement should propel GBP/USD higher on relative central bank policy expectations.  Regarding BoE policy, MPC member Weale (a hawk) has spoken of ‘perverse effects’ related to further interest rate cuts. 

Yesterday, the EUR/GBP extended the uptrend that started on Tuesday. Early in the session, the pair basically followed the trading pattern of the EUR/USD headline pair. So, EUR/GBP came with striking distance of this week’s top at 0.7909, but a real test didn't occur and a limited correction kicked in. However, the euro remained well bid overall and this supported also the EUR/GBP cross rate. At the noon, the pair spiked higher and set a minor correction high. The move was partially driven by the broader EUR/USD gains at that time, but it was also a reaction to a weaker than expected UK CBI sales report. This was clearly different from the recent price pattern as sterling mostly ignored poor UK data of late. The pair set a minor intraday high. At first there were no immediate follow-through gains, but later in the session further euro gains pushed the pair to a new top at 0.7924. The currency pair closed the session at 0.7921, compared to 0.7889 on Wednesday.

Traders will keep an eye on the details/first revision of the Q2 UK GDP.A slight upward revision from the awful preliminary reading (-0.5% Q/Q vs -0.7% is expected). Even such an ‘improvement’ can hardly be seen as a support for sterling.

Given yesterday’s negative reaction to the weaker than expected CBI report, we look out whether sterling would become more sensitive to weaker than expected UK eco data. However, we expect that the global price pattern of the euro will still be the dominant factor for EUR/GBP trading. Will the global euro re-positioning/rebound gradually run out of steam?

The EUR/GBP cross rate reached a correction low at 0.7755 at the end of last month on global euro weakness. The commitment from ECB’s Draghi to do whatever is needed to protect the single currency also provided a solid support for the EUR/GBP pair. The run toward the key 0.77 support area (October 2010 low) was aborted and the pair reached a corrective top at 0.7963 mid August. As was the case for EUR/USD, trading visibility on the ECB/EU strategy to address the crisis was also not concrete enough to support a further rebound of the euro against the sterling. EUR/GBP settled in a tight sideways range in the 0.7800 big figure.

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