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GBP/USD: Trading the Change in U.K. Jobless Claims

GBP/USD: Trading the Change in U.K. Jobless Claims

2010-03-16 18:06:00
David Song;Michael Wright,
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Trading the News: U.K. Jobless Claims Change

What’s Expected
Time of release:        03/17/2010 09:30 GMT, 05:30 EST
Primary Pair Impact :    GBPUSD
Expected:         6.0K
Previous:         23.5K

Effects the change in Jobless Claims has had over GBPUSD for the past 2 months

03.16_TTN1

January 2010 U.K. Jobless Claims Change

Claims for unemployment benefits in the U.K. unexpectedly leapt to the highest level since April of 1997, with the amount of individuals filing for government support rising 23.5K in January to 1.64 million. As a result of the ongoing weakness in the private sector, the Bank of England maintained a cautious outlook for the economy and said that employment is at risk of falling “significantly further” as policy makers continue to see a risk for a protracted recovery. Meanwhile, BoE Governor Mervyn  King held a dovish outlook for future policy and argued that it is “far too soon” to conclude its easing program, and the central bank is likely to maintain its current policy throughout the first-half of the year in order to balance the risks for growth and inflation. Nevertheless, as the expansion in monetary and fiscal policy continues to feed through the real economy, conditions are likely to improve as the government aims to encourage a sustainable recovery. 03.16_TTN2

December 2009 U.K. Jobless Claims Change

U.K.  jobless claims in December dived 15.2K from a downward revision of 10.8K the previous month amid economists’ expectations of 4.6K decline, the National Statistics said in London. The greater-than-expected drop in unemployment marks the biggest fall since April 2007, and conditions are likely to improve going forward as the expansion in monetary and fiscal policy continues to feed through the real economy. However, Bank of England Governor Mervyn King announced that unemployment is likely to remain high as the U.K. faces “a long period of healing” and remains in the “very early stage of the recovery.” Going forward, the central bank is likely to keep  borrowing costs at 0.50% and may look to expand its asset purchase program over the coming months as policy makers aim to cement the economic recovery. 03.16_TTN3

What To Look For Before The Release

Traders with access to market depth information via the FXCM Active Trader Platform may use it to gauge the potency of the economic data release as well as to shed some light on the market’s directional bias. Increasing volume ahead of the announcement will telegraph likely follow-through behind whatever move is to materialize, while an imbalance in available liquidity on the Bid versus the Offer side of the market will tell us the direction major institutions are likely favoring ahead of the announcement:

Bullish Scenario:

If we see substantially deeper available liquidity on the Bid side of the market, this tells us that major price providers in the market are looking to buy the GBP against the US Dollar. Considering that close to 60% of all FX market volume is cleared through just six top banks, we see it prudent to be on the same side of the trade as major institutions and will favor a bullish bias on GBPUSD ahead of the data release.
Bearish Scenario:

If we see substantially deeper available liquidity on the Offer side of the market, this tells us that major price providers in the market are looking to sell the GBP against the US Dollar. Considering that close to 60% of all FX market volume is cleared through just six top banks, we see it prudent to be on the same side of the trade as major institutions and will favor a bearish bias on GBPUSD ahead of the data release.
00001_GBP 00002_GBP

How To Trade This Event Risk

Claims for jobless benefits in the U.K. are expected to increase 6.0K in February following the unexpected 23.5K rise in the previous month, and the ongoing weakness in the private sector may lead the Bank of England to maintain a dovish outlook for future policy as households continue to face fading demands for employment paired with tightening credit conditions. The preliminary 4Q GDP reading showed the growth rate expanded less-than-expected, weighed by a 3.1% drop in business investments, while a 1.2% jump in government spending helped to support economic activity throughout the last three-months of 2009. Moreover, a report by the National Statistics Office showed industrial outputs unexpectedly slumped 0.4% in January to mark the first decline since August, while retail spending tumbled 1.2% from December, which exceeded forecasts for a 0.5% decline. As policy makers continue to see a risk for a protracted recovery, businesses may a keep a lid on production and employment going into the second-half of the year, and the central bank may see scope to expand its emergency program over the coming months as they aim to balance the downside risks for growth and inflation.

Nevertheless, the BoE held a dovish tone in its quarter inflation report and said that the recovery was “somewhat weaker” than previous expected, with the ongoing slack in the economy continuing to weigh on the outlook for future growth. As a result, the central bank anticipates to see a moderate recovery this year and projects GDP to increase 1.4% in 2010 amid an initial forecasts for a 2.2% expansion in the growth rate. Moreover, BoE Governor Mervyn King reiterated that he continues to see a “substantial margin” of slack in his letter to Chancellor of the Exchequer Alistair Darling, and went onto say subdued wage growth would continue to drag on GDP and inflation as private-sector spending remains one of the leading drivers of growth. At the same time, BoE board member Kate Barker held a dovish tone during an interview with the Western Morning News and saw a risk for “a quarter when GDP falls” as she expects a “bumpy and fragile” recovery, and the central bank may hold a dovish policy stance going into the second-half of the year as the MPC sees scope to expand its asset purchases program beyond the GBP 200B target.

Expectations for a rise in U.K. jobless claims could lead to a selloff in the British Pound but nevertheless, price action following an enhanced labor report could drive the exchange rate higher as growth prospects improve. Therefore, if demands for unemployment benefits hold flat or unexpectedly fall in February, we would need to see a green, five-minute candle following the release to confirm a buy entry on two-lots of GBP/USD. Once these conditions are fulfilled, we will place the initial stop at the nearby swing low or a reasonable distance, and this risk will establish our initial target. Our second objective will be based on discretion, and we will move the stop on the second lot to breakeven once the first trade reaches its mark in an effort to lock-in our profits.

In contrast, the slump in business spending paired with the ongoing slack in the economy may continue to weigh on the U.K. labor market, and a rise in jobless claims could spark a drop in the exchange rate as policy makers see a risk for a protracted recovery. As a result, if claims increase 6.0K or greater from the previous month, we will favor a bearish outlook for Cable, and will implement the same strategy for a short pound-dollar trade as the long position laid out above , just in reverse.

03.16_TTN4

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To discuss this report contact David Song, Currency Analyst: instructor@dailyfx.com

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