Sterling Pounded by GDP Shock

Sterling reverses recent gains and falls sharply after the release of much worse than expected Q3 GDP report. The UK economy unexpectedly shrank -0.4% qoq in Q3 versus expectation of 0.2% growth. Year-over-year rate also disappointed by contracting at -5.2%. The data marked the sixth consecutive quarters of decline in the economy, the longest losing streak since record began in 1950s. The shock bolstered speculation that BoE would be forced to extend the GBP 175b asset purchase program.

Today's sharp fall in sterling indicates that a short term top is at least in place at 1.6692 in GBP/USD and 135.21 in GBP/JPY. The reversal ahead of 1.6740 and 153.22 resistance intact in the pairs reaffirm the medium term bearish case that both has already topped out in October. On the other hand, EUR/GBP's pull back could have completed already earlier this week and we're looking at the prospect of rally resumption to 0.9410 high and beyond in near term. GBP/CHF's recovery could have completed at 1.6791 too and a break of 1.6115 support will target 1.5111 low next.

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Elsewhere, German Ifo business climate rose to 91.9 in October but missed expectation of 92. Eurozone PMI manufacturing and services both improved to 50.9 and 52.3 respectively in October. Eurozone industrial orders rose 2.0% in August versus consensus of 1.2%. Australia import price index dropped more than expected by -3.0% qoq in Q3.

GBP/USD Mid-Day Outlook

Daily Pivots: (S1) 1.6525; (P) 1.6581; (R1) 1.6677; More

GBP/USD's sharp fall and break of 1.6484 minor support indicates that a short term top is in place, with bearish divergence conditions in 4 hours MACD and RSI. Intraday bias is turned neutral for the moment. Note that while the rebound from 1.5706 was strong, it was still limited below mentioned 1.6740 resistance. There is no confirmation of completion of fall from 1.7043 yet. A break of 61.8% retracement of 1.5706 to 1.6692 at 1.6083 will argue that fall from 1.7043 is indeed still in progress and should target a test of 1.5076 low first. However, a strong break of 1.6740 will confirm that whole fall from 1.7043 has completed and will pave the way to retest 1.7043 high instead.

In the bigger picture, outlook in GBP/USD is rather mixed for the moment. With 1.6740 resistance intact, we'd slightly prefer the bearish case. That is, medium term rebound from 1.3503, which is treated as correction in the long term down trend from 2.1161, has completed at 1.7043. Break of 1.5706 will affirm this case and target a retest of 1.3503 low in medium term. However, not that break of 1.6740 resistance will confirm that fall from 1.7043 has completed with three waves down to 1.5706 already. The three wave structure argues that it might be a correction to medium term rebound from 1.3503 only. In other words, another high above 1.7043 should be seen before GBP/USD tops out.

GBP/USD

Economic Indicators Update

GMTCcyEventsActualConsensusPreviousRevised
0:30AUDImport price index Q/Q Q3-3.00%-2.60%-6.40% 
7:30EURGerman PMI Manufacturing Oct A51.150.249.6 
7:30EURGerman PMI Services Oct A50.952.552.252.1
8:00EUREurozone PMI Manufacturing Oct A50.750.24949.3
8:00EUREurozone PMI Services Oct A52.351.350.650.9
8:00EURGerman IFO - Business Climate Oct91.99291.3 
8:00EURGerman IFO - Current Assessment Oct87.38887 
8:00EURGerman IFO - Expectations Oct96.896.295.7 
8:30GBPGDP Q/Q Q3 A-0.40%0.20%-0.60% 
8:30GBPGDP Y/Y Q3 A-5.20%-4.60%-5.50% 
8:30GBPIndex of Services 3mth/3mth Aug-0.10%0.10%-0.20%-0.30%
9:00EUREurozone Industrial New Orders M/M Aug2.00%1.20%2.60%3.00%
9:00EUREurozone Industrial New Orders Y/Y Aug-23.10%-22.50%-24.30%-24.90%
12:30USDFed's Bernanke Speaks on Regulation at Boston Fed Conference ---- 
14:00USDExisting Home Sales Sep 5.40M5.10M 
15:30USDFed's Kohn Speaks on Panel at Boston Fed Conference --