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

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

2010-05-11 18:50:00
David Song, Currency Strategist
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Trading the News: U.K. Jobless Claims Change

Why Is This Event Important:

As policy makers in the U.K. maintain a loose policy stance and continue to support the real economy, a drop in unemployment is likely to instill an enhanced outlook for the region as private sector spending remains one of the leading drivers of growth. A third monthly decline in demands for jobless benefits would certainly raise the prospects for a sustainable recovery, which could lead the central bank to drop its dovish outlook as monetary policy.

What’s Expected:
Time of release:        05/12/2010 08:30 GMT, 4:30 EST
Primary Pair Impact :    GBPUSD
Expected:         -20.0K
Previous:         -32.9K

Will This Be Market Moving (Scenarios):

Claims for unemployment benefits in the U.K. are forecasted to contract another 20.0K in April following the 32.9K drop in the previous month, and the data is likely to encourage an improved outlook for future growth as the economic recovery gathers pace. As a result, the central bank may raise its economic assessment for 2010 and see scope to normalize policy further over the coming months in order to balance the risks for growth and inflation.

The Upside


As businesses increase their rate of production at the fastest pace since 2002, the jump in factor outputs could lead to an accelerated rebound in the labor market and encourage firms to expand their labor force at a greater pace over the coming months. Indeed, the reading for the past two-months have certainly exceeded expectations, with demands for unemployment benefits unexpectedly slipping 40.1K in February to mark the biggest decline since 1997, and conditions are likely to improve further going into the second-half of the year as the expansion in monetary and fiscal policy continues to feed through the real economy.

The Downside

However, businesses may look to keep a lid on employment in aspirations for higher profit margins, which could lead to a dismal employment report. At the same time, the International Labour Organization’s gauge for unemployment unexpectedly jumped to 8.0% during the three-months through February from 7.8% in the previous period, and another rise in the jobless rate could stoke fears of a protracted recovery as households continue to face the deterioration in the labor market paired with tightening credit conditions.

How To Trade This Event Risk

Trading the given event risk favors a bullish outlook for the British Pound as economists expect the U.K. labor market to improve for the third consecutive month in April, and price action following the release could set the stage for a long Cable trade as investors weigh the prospects for a sustainable recovery. Therefore, if jobless claims slump 20.0K or greater from the previous month, we will 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 out first objective. The second target 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.

On the other hand, businesses may remain reluctant to increase their labor force as policy makers maintain a dovish bias for future, and a dismal employment report could weigh on the exchange rate as investors scale back expectations for a rate hike later this year. As a result, if claims for jobless benefits contract less than 10K or unexpectedly expands 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.

05.11_TTN1

Impact that the Jobless Claims Change has had on GBP during the last month

05.11_TTN2

March 2010 U.K. Jobless Claims Change

Jobless claims in the U.K. tumble 32.9K in March to 1.54M following a revised 40.1K contraction in the previous month, which exceeded expectations for a 10.0K drop in demands for unemployment benefits. However, the International; Labour Organization’s gauge for unemployment unexpectedly jumped to 8.0% during the three-months to February from 7.8% in the previous period to mark the highest reading in 16 years, and the deterioration in the labor market may continue to weigh on the outlook for future growth as policy makers see a risk for a contraction in GDP later this year. Meanwhile, the Bank of England minutes showed the MPC voted unanimously to hold the benchmark interest rate at 0.50% and maintain its asset purchase target at GBP 200B, but went onto say same policy makers expressed concerns of the “above-target inflation” as price growth exceeded the central bank’s upper limit for the second-time this year. 05.11_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_EUR 00002_EUR

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

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