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UK GDP growth shines

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By Naeem Aslam 

We finally have some good news about the UK economy, which has emerged out of recession.

The economy has been in a black hole for a long period, and Friday’s data has brought a new beacon of hope for traders and investors.

Although the GDP growth number confirmed only a marginal growth of 0.6%, investors are cheering this on the basis that the number is not only positive, but also better than the forecast of 0.4%.

One concern that we do see lingering is what this means in terms of the central bank’s monetary policy. This is because inflation is still sky high in comparison to the Bank of England’s target, and if growth numbers have started to move in the right direction, surely the bank can use this as an excuse to keep the rates higher for longer, just like the Fed has done.

However, traders should continue to feel confident about riskier assets because an improvement in GDP is actually good news, no matter how you look at it, and the BoE is unlikely to change its monetary policy. This is because Governor Andrew Bailey said on Thursday that rates are going to come down much more rapidly than many think.

This is the reason that the increase in Sterling’s price against the dollar index will have a limited upside.

The initial reaction is very much a spike to the upside; however, it is unlikely that this momentum will continue to the upside unless we see an actual weakness in the dollar index.

The current move is more than likely to fade away for sterling once the dust has settled and the downward momentum continues.

Good news is good news

Regarding the FTSE 100, good news is good news, and bad news is also good news.

Having said that, traders and investors should think carefully before going all in and this is because the actual fundamentals of the UK’s economy are still weak and traders should not get ahead of themselves. The index is likely to experience a pullback, which could easily push it down by 400 points.

The price action continues to trade above the upward trend line which shows bulls are in control of the price action. Further evidence of this comes from the fact that the price is also trading above the 50 and 100 day SMAs.

As long as the price continues to trade above these important price levels (the upward trend line, the 50 and 100-day SMAs) we are likely to see more improvements in the price action.

The immediate support will be the purple trend line and a break of this will open the door towards the next support zone which is the green line. As for resistance, it is near the red line.

Trading Indices: FTSE 100 Chart by CompareBroker.io

 

Naeem Aslam is Chief Investment Officer at Zaye Capital Markets.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Zaye Capital Markets.