Forex Trading Guide: U.K. Preliminary Q1 GDP Report

The forex calendar shows that we’ve got a jampacked trading week with plenty of top-tier events coming up. Let’s get right to the action with this trading guide for the U.K. GDP release tomorrow.

What is this report all about?

uk gdpGDP is short for gross domestic product, which refers to the total value of goods and services produced by the economy during the reporting period. This comprises consumer spending, business production, government spending, and trade activity. The GDP report is typically released on a quarterly basis and in percentage form, allowing forex market watchers to gauge whether the economy expanded or contracted from one quarter to the next.

As such, a country’s GDP reading is considered its quarterly report card, with improving grades likely to spur currency appreciation and weakening figures usually resulting to currency depreciation. The U.K. releases three versions of its GDP report – preliminary, revised, and final – and the preliminary release tends to generate the strongest reaction in the forex market.

What happened last time?

The previous U.K. GDP release indicated that the economy lost a bit of momentum in the last quarter of 2014 as the reading reflected 0.6% growth, slower than the previous period’s 0.7% expansion and Q2 2014’s 0.9% GDP figure. All in all, these contributed to a 2.6% annual GDP reading for the U.K. economy, its strongest year-over-year growth since the country’s pre-financial crisis days.

Despite that, the pound still weakened against most of its forex counterparts after the report was released, as market participants speculated that the U.K. might not be able to sustain its pace of expansion. At that time, the downturn in inflation was also weighing on global economic growth prospects, also contributing to the pound’s decline.

What is expected for the upcoming release?

For Q1 2015, the U.K. economy is expected to print yet another slowdown in growth, as the GDP reading is slated to come in at 0.5%. Recent reports from the U.K. suggest that a downside surprise might even be likely.

Consumer spending has been off to a rocky start this year, with Brits barely increasing their purchases even with cheaper price levels. The latest trade balance shows that exports have been lagging due to global growth concerns, weighing on manufacturing production for the period.

How might GBP/USD react?

As you’ve learned in the School of Pipsology lesson on Fundamental Analysis, strong economic performance tends to boost the local currency while weak data typically leads to a selloff. Of course these reports must also be taken in the proper context, which usually involves looking at their central bank’s monetary policy bias.

Minutes of the latest BOE meeting revealed that policymakers are starting to revert to an upbeat stance, which probably had a bunch of forex market watchers hoping for a strong GDP release. Better than expected results could add fuel to the pound’s ongoing rally while a weak figure could spell a lot of disappointment for pound bulls.

Bear in mind that the initial reaction to the release could be a volatile one and if fast-paced price action ain’t your cup of tea, there ain’t no shame in waiting for the dust to settle before hopping in the longer-term trends.