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Jignesh Davda

UK GDP Falls short, Fresh Two and Half Year Lows in Sight

GBP/USD broke lower from a bearish flag pattern on Thursday and extended losses in early trading today after GDP growth in Britain missed expectations.

The Office for National Statistics reported GDP unchanged in June while analysts were looking for a 0.1% rise in month over month growth. On a quarterly basis, GDP contracted for the first time in about seven years. Analysts had been calling for GDP to remain unchanged in the second quarter, and therefore the 0.2% contraction took the markets by surprise.

In addition to GDP, manufacturing production declined 0.2% in June, also missing the estimate for a decline of 0.1%.

The all around disappointing figures led to a fall in the British pound against all of its major counterparts. GBP/USD caught a bid from support that has held the pair higher on a few attempts in the month thus far. However, the pair certainly looks like it is ready to extend losses to a fresh multi-year low.


Technical Analysis

It became apparent in the second half of the week that GBP/USD was developing a bearish flag pattern. Yesterday, the pair broke sharply lower to activate it and there was a retest of the lower bound in late European trading. In fact, the pair seemed to hover around the breakout point for longer than what is typical.

GBPUSD Hourly Chart

In yesterday’s forecast, I had mentioned that an area where we may see some profit taking if the bear flag breaks is near the recent lows. So far, this area contained the immediate reaction following the data release. I do expect that we break below this support considering the broader trend and momentum.

The session ahead is not likely to have a lot of volatility considering the light economic calendar. The next important release is producer price index figures from the US. This release often elicits a muted reaction.

Support for the pair at 1.2090 remains in play for the rest of the session. Perhaps a catalyst is not in place for a break today, but I expect that if the pair gets below support, it might accompany a quick move to the 1.2000 handle.

Bottom Line

  • A bear flag pattern in GBP/USD is in play.
  • Disappointing UK data has put pressure on Sterling.
  • Support at 1.2090 has held the pair higher in the session thus far.
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