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

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

2011-02-15 20:49:00
David Song, Currency Strategist
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Trading the News: U.K. Jobless Claims Change

What’s Expected:

Time of release: 02/16/20119:30 GMT, 4:30 EST

Primary Pair Impact : GBPUSD

Expected: -3.0K

Previous: -4.1K

DailyFX Forecast: -5.0K to -12.0K

Why Is This Event Important:

Claims for unemployment benefits in the U.K. are forecasted to fall another 3.0% in January after contracting 4.1K in the previous month, and the ongoing recovery in the labor market could spark a bullish reaction in the British Pound as the outlook for future growth improves. However, as the Bank of England is scheduled to deliver its quarter inflation report at 10:30 GMT, market reaction to the employment report could be short-lived, and the GBP/USD may consolidate ahead of the central bank’s statement as investors weigh the prospects for future policy. Nevertheless, the near-term rally in the British Pound could gather pace if we see an enhanced labor report paired with hawkish comments from the BoE, and the exchange rate may continue to retrace the decline from earlier this month as market participants speculate the MPC to gradually normalize monetary policy later this year.

Recent Economic Developments

The Upside

Release

Expected

Actual

PMI Manufacturing (JAN)

58.0

62.0

PMI Construction (JAN)

49.5

53.7

PMI Services (JAN)

51.3

54.5

The Downside

Release

Expected

Actual

GDP (4Q A)

0.5%

-0.5%

NIESR GDP Estimate (JAN)

--

-0.1%

PPI Input (YoY) (JAN)

12.7%

13.4%

As the gauge for U.K. manufacturing expands at a record pace in January, with building activity rebounding from the previous month, firms may increase their willingness to expand their labor force as private sector activity gathers pace. However, the unexpected downturn in 4Q GDP paired with the economic contraction in January could bear down on businesses sentiment, and firms may keep a lid on employment as input prices rise the most since October 2008. In light of the recent developments, the Bank of England is likely to retain its wait-and-see approach throughout the first-half of 2011 as it aims to balance the risks for the region.

Potential Price Targets For The Release

GBPUSD_Trading_the_Change_in_U.K._Jobless_Claims_body_ScreenShot020.png, GBP/USD: Trading the Change in U.K. Jobless Claims

How To Trade This Event Risk

Projections for fourth consecutive decline in jobless claims favors a bullish outlook for the British Pound, and price action following the release could pave the way for a long sterling trade as the outlook for future growth improves. Therefore, if claims weaken 3.0K or greater from the previous month, we will need a green, five-minute candle subsequent to the data to establish a buy entry on two-lots of GBP/USD. Once these conditions are fulfilled, we will set the initial stop at the nearby swing low or a reasonable distance after taking market volatility into account, and this risk will generate our first target. The 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, rising commodity prices paired with the ongoing weakness within the real economy may lead firms to keep a cap on employment, and a dismal labor report is likely to bear down on the exchange rate as the outlook for future growth falters. As a result, if claims hold steady or unexpectedly increase from the previous month, we will implement the same strategy for a short pound-dollar trade as the long position mentioned above, just in reverse.

Impact that the Change in U.K. Jobless Claims has had on GBP during the last month

Period

Data Released

Estimate

Actual

Pips Change

(1 Hour post event )

Pips Change

(End of Day post event)

Dec 2010

01/19/2011 9:30 GMT

0.0K

-4.1K

-47

-17

December 2010 U.K Jobless Claims Change

Jobless claims in the U.K. unexpectedly slipped 4.1K in December to a 21-month low of 1.457M, while the claimant count rate held steady at 4.5% for the seventh consecutive month. A deeper look at the report showed unemployment amongst 16 to 24 year olds jumped 20 percent to mark the largest advance since the series began in 1992, while the jobless rate using the International Labour Organization’s methodology held steady at 7.9% for the second month. Given the ongoing weakness within the private sector, the Bank of England is likely to support the real economy throughout the first-half of 2011, and the central bank may keep the door open to expand monetary policy further this year as the tough austerity measures bear down on the economic recovery. Despite the unexpected drop in unemployment, the British Pound lost ground following the release, with the GBP/USD slipping to a daily low of 1.5945, but we saw the sterling recoup its losses as the exchange rate ended the trading session at 1.5993.

GBPUSD_Trading_the_Change_in_U.K._Jobless_Claims_body_ScreenShot019.png, GBP/USD: Trading the Change in U.K. Jobless Claims

Questions? Comments? Join us in the DailyFX Forum

View the Expo Presentation on ‘Trading the News’ For Additional Resources

To Give Feedback on the New Layout, Please Send Your Comments or Recommendations to David Song, Currency Analyst: dsong@dailyfx.com

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