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The Pound rises on UK GDP data as estimates beat expectations

The UK GDP data has been a great start for the UK today following on from yesterday’s breakout for the FTSE100. The US CPI data from yesterday came in as expected and that softened the dollar bulls which fortuitously has allowed the pound to gain today.

Market Brief

Today has started well for the UK and the Great British Pound. Gross domestic product (GDP) data published by the Office for National Statistics (ONS) is estimated to have grown for a fifth consecutive month in June 2021, by 1.0%, but remains 2.2% below its pre-pandemic level (February 2020). Rishi Sunak the UK’s Chancellor of the Exchequer declared the latest economic report showed that the UK’s Q2 GDP grew at the fastest rate of all G7 countries. However, the UK government is going to have to support the economy for longer as the shock to the economy and public services was significant.

Services continued to be the main contributor to GDP’s recovery in June 2021, growing by 1.5% in June 2021 following a revised 0.7% growth in May 2021. Hospitality has benefitted from its first full month of indoor dining since coronavirus (COVID-19) restrictions were eased on 17 May, which is encouraging for the coming data which will include the full opening from July 19th.

The GBPUSD H1 chart is probably the easiest to trade as we’re in a clearly defined channel and 1.3850 is acting as current support. These descending channels generally break to the upside, so I am anticipating the good news out of the UK today to lift the pound higher from the base.

Interestingly the GBPUSD sentiment is fairly even but the EURGBP is showing an extreme reading of 93% of traders on the ActivTrader platform essentially shorting the pound to buy euros. The EURGBP has fallen below its multi-month support and yesterday’s US CPI readings were enough to put a pause on the rising US dollar. Both of these elements to the story suggest to me that the euro is generally weaker, the EURGBP is going to fall and squeeze out the traders who are long and the GBPUSD is set to benefit.

Maybe the FTSE100 traders front ran today’s data, as the breakout was clear and ended with strength. Today’s price action is not great for the index but a close above the breakout level would confirm the bullish trend, whereas a close below the breakout line could start a technical sell-off. If the UK economy is doing well investors will want to buy in at value.

Later, today we have the US PPI data which is the Change in the price of finished goods and services sold by producers. Whether or not the factory input prices can be passed on to the consumer is key when the prices of materials are rising.

The trend has been for higher PPI readings for 11 months, so one would imagine base effects, bottlenecks, and supply chain disruptions will be fading out of the data soon. From last month’s BLS report:

The Producer Price Index for final demand increased 1.0 percent in June. Final demand prices rose 0.8 percent in May and 0.6 percent in April. On an unadjusted basis, the final demand index moved up 7.3 percent for the 12 months ended in June, the largest advance since 12-month data were first calculated in November 2010.

Yesterday’s US Core CPI came in as expected and that data will probably overshadow today.

I find it interesting that the US dollar index fell short of creating a new higher swing high and that as the CPI data was in line with expectations, how quickly traders have reacted to saying the inflation is most probably “Transitory”. If the inflation data does now fall lower as base effects pass through, the worry for the Hawks is that the Fed delays the tapering and rate hikes. Though from what has been said by some key FOMC voting members, the jobs data is in a place where they are happier now and they are putting a lot of emphasis on that rather than the prices of things.

At the beginning of the week, I said Friday’s reaction to the NFP data felt very emotional. The “flash crash” in the precious metals felt more like the weak longs were being tripped out of their positions. Now Gold is at resistance from the previous market structure, having found support at a well-tested level. The higher high today suggests to me we see Gold rising further.

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