The Pound “Reverts to Mean” as Optical Illusion in GDP Data Catches Traders Out
Foreign exchange traders may have unnecessarily punished the Pound in the wake of the release of Wednesday’s GDP release and it must therefore recover back to higher levels against the Dollar and Euro we are told.
Contained in the release were data showing business investment had slipped 1% in the fourth quarter with traders taking this as a sign the UK economy is in danger of slowing down.
“The pound was the worst-performing G10 currency over the last 24 hours after the revised Q4 GDP figures showed business investment growing more slowly than expected (but net exports higher),” says Marshall Gittler at FX Primus.
But, it turns out that both these effects were caused by a revision to the data for non-monetary gold.
“In other words, it was an optical illusion. As investors read the details, they should gradually correct that misunderstanding and the Pound in theory should revert to the higher levels that it was at on Tuesday,” says Gittler.
The analyst forecast the Pound to “revert to mean” as a result.
This suggests the Pound will recover back to recent levels against the Euro and US Dollar.
Price action suggests this is indeed happening with the Pound to Dollar exchange rate back up to 1.2475 and the Pound to Euro exchange rate back above 1.18 again.
The Pound to Dollar exchange rate continues to tread water in familiar ranges. The failure to break above 1.2500 leaves us trapped between support at 1.2410-1.2345 and 1.2500-1.2570 resistance.
The Pound to Euro exchange rate is banging its head on the 200-day moving average located in the vicinity of 1.1814. We note here that a clear break of this level will turn the outlook into a more positive affair.
What is the Non-Monetary Gold Market?
According to the ONS, the UK holds the world’s largest market for over-the-counter transactions in gold: the London Bullion Market (LBM).
According to an LBMA article as much as 8% of the world gold trade was done through the LBM in 2011.
Trading on the LBM is largely conducted by members of the London Bullion Market Association (LBMA), who are, in the main, international banks or dealers and refiners.
The LBMA was formed in 1987 as a result of the Financial Services Act (1986) and the rapid growth of London’s gold market throughout the 1980s. It was as a result of this rapid expansion that the LBM has become the world’s most prominent global market for gold.
The ONS notes the market, "could have a large impact on the overall trade figure: the introduction of a large, volatile time series could obscure other trends in the UK’s trade data."
Which is what we believe occured in initial reading of UK GDP stats on Wednesday, February 22.
