Over the last several months, most analysts have been very concerned about growth prospects in the U.K.  as Prime Minister Cameron has been slashing public spending in an attempt to reign in a huge public deficit.  Bank of England Governor Mervyn King has been quite dovish concerning U.K. growth and has stated that it will be a very long road to full recovery in the U.K.

Therefore, today's GDP figure was quite a surprise, and the market responded accordingly.  GDP was expected to come out at 0.4%, and it actually came out at 0.8%.  This sizeable surprise caught the market off-guard and traders immediately bought the British Pound with fury.  Take a look at the direct aftermath of the news release.
 Note: Past performance is not indicative of future results.
You can see from the price action in the chart above that the market was caught completely off-guard with the GDP report.  The pound rallied from a pre-release price of 1.5775 to 1.5843 in a matter of minutes, and within 30 minutes the pound had reached 1.5870 for a nearly 100 pip rise.  The proceeding price action shows that buyers wanted the Pound as they bid prices up higher after the initial pull-back.  The Pound finally reached an intra-day HI of 1.5895 by 6:30 am before prices finally began to back off.

Where Is the Pound Headed?

If you look at the GBP/USD and the EUR/USD on a Daily chart over the last several months, you can see that the rise in the euro is much more aggressive than the rise in the pound.  The primary reason is because the austerity measures being implemented in the U.K. have been wearing on economic growth, and Governor King has been quite straightforward about the hard times ahead for the U.K. economy over the next several years.  Therefore, today's number is enough to make traders begin to reconsider this position, which is why we have seen such a sharp and decisive rally in the Pound today.

The real indicator will be to see how the GBP/USD closes at the end of the New York trading session.  If the Pound can remain above that horizontal support line in the chart above at 1.5828, then there is a good chance the GBP/USD will make another leg higher during the London session Wednesday morning.  However, if that 1.5828 level is broken to the downside, and the Pound is trading below 1.5828 at the end of the New York session on Tuesday, then that will be an indication that buyers were not able to consolidate gains and keep sellers at bay.  Currently, the action is looking a bit bearish because of the consecutive lower HI's we now see in the chart above.  This is a classic descending triangle, which can lead to strong downward movements.

Dollar Continues to Rally

The U.S. dollar has continued broad-based gains against most major currencies on Tuesday as investors continue to evaluate whether lower levels in the dollar are warranted in the near-term.  We stated in yesterday's report that the dollar would most likely find continued support this week since it was able to shake off the G20 Summit during Monday trading.  Sure enough, the dollar has rallied today against every major currency pair except for the British Pound.
 Note: Past performance is not indicative of future results.
You can see in the Daily Chart above that the dollar performed quite well yesterday.  Although, it was weak early in the day on the heels of the G20 Summit, the dollar regrouped in early morning trading and performed well the rest of the day.  Today, dollar strength has continued.  The better-than-expected GDP figures out of the U.K. did lead the Pound to outperform the dollar today, but it was the only major currency that did.  The next area of significance for the dollar is the previous HI from last week at 78.36.  If the dollar can break above that swing HI, then much higher levels could be in store for the dollar in the near term.  The next area of heavy resistance beyond the 78.36 level will be the 80.00 area, which is a key level of historical support/resistance, 50% Fib Retracement of the last swing, and a key psychological area.  If this area is hit next week, it should offer strong resistance.

Is The International Currency War Really Over Before It Begins?

Many traders and analysts were expecting tensions to mount during the G20 Summit, and no one was sure what exactly would develop.  Conflict between emerging markets and developed nations has been growing for some time now due to the fact that investors are removing capital from developed nations such as the United States, U.K. and Europe because of historically low interest rates, and they are placing that speculative capital into emerging markets.  This increased capital flow into emerging market is causing an aggressive appreciation of emerging market currencies, and emerging market countries are beginning to get a bit upset.  Expensive currencies make their exports less attractive in international trade, and they argue that it threatens to derail what has been a very strong economic recovery among developing nations.

Central Bank intervention in the FX Market has been at very high levels in recent months as countries attempt to fight off a stronger currency.  Brazil, in fact, just raised a tax on foreign investors purchasing Brazilian real bonds for the second time this month.  There were no escalating conflicts at the G20; instead, countries walked away from the G20 promising not to intervene in the fx market.  But will these tensions really be assuaged so easily?

Currently, there is increasing pressure on account-surplus nations to stimulate and develop domestic demand in order to bring greater balance to the global economy.  This conflict goes hand in hand with the debate over increased capital flows into emerging markets.  It seems that tension is building regarding both of these issues, and further developments in the next few months on either of these issues could definitely cause large trends to develop in the FX Market.