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How To Trade This Event Risk


The GBP/USD has remained in a trading range between 1.9600 to 2.000 for nearly a month. The upcoming first quarter growth numbers may provide the impetus to break it free and put it onto its next trend phase. The economic report is expected to show growth slowed for a consecutive quarter to 0.4%, bringing the annualized rate to 2.6%, and remaining below its recent growth trend average of 3%. The housing slump brought on by the recent credit crisis has started to weigh on consumer confidence leading to retail sales declining for the first time in three months. The BoE in an attempt to jump start the housing market recently infused 50 billion in liquidity into the market., when it traded treasuries for mortgage back securities. The move brought more fear than relief as speculation grew that there was more fallout ahead from the credit crunch. Inflation concerns on the back of record oil prices have provided support for the Pound as the BoE has been adamant that price stability remains a focus of theirs. However, growth prospects have grown dimmer as indicated by the recent CBI manufacturing survey. The forward looking indicator saw sharp declines in expectations for orders and output, with 13% more negative responses than positive. Therefore, the inflation argument may lose its influence on the cable, leaving it exposed to more downward pressure.

The negative expectations and recent softening fundamentals leaves the greatest chance for volatility with a rebound in growth. Although March’s retail sales declined, they managed to exceed expectations and were resilient throughout the first quarter. Therefore, the potential for an upside surprise exists, especially considering that unemployment has remained firm at 2.5%. With strong GDP readings from both the quarterly and annual figures, we will look for a five minute green candle to confirm entry on a long, two lot GBPUSD position. The stop for both lots will be set either at the nearby swing low or at a reasonable, fixed distance. The target on the first half of the trade will equal the distance to the stop, while the second lot’s objective should be taken on discretion. When the first lot takes profit, the stop on the second should be moved up to break even to conserve profit.

The most likely scenario, given the toll the housing slump, rising inflation and tight credit markets have exacted on the economy, is that growth slowed. If the GDP numbers cross the wires worse than expected, we will use the same criteria and strategy setup for a short as we would for the long, except in reverse.