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

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

2011-03-15 20:20:00
David Song, Currency Strategist
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Trading the News: U.K. Jobless Claims Change

What’s Expected:

Time of release: 03/16/2011 9:30 GMT, 5:30 EST

Primary Pair Impact : GBPUSD

Expected: 1.3K

Previous: 2.4K

DailyFX Forecast: -3.0K to 1.5K

Why Is This Event Important:

Jobless claims in the U.K. are forecasted to increase another 1.3K in February after expanding 2.4K in the previous month, and the protracted recovery in the labor market is likely to weigh on the British Pound as the outlook for future growth deteriorates. In turn, the Bank of England may retain its wait-and-see approach throughout the coming months, and the central bank may continue to talk down the risk for inflation as policy makers expect the substantial margin of slack within the real economy to bear down on price growth. As interest rate expectations falter, the recent decline in the GBP/USD may gather pace going forward, and the exchange rate may break out of the narrow range carried over from the previous month as the central bank curbs speculation for higher borrowing costs in the first-half of 2011.

Recent Economic Developments

The Upside

Release

Expected

Actual

Industrial Production (MoM) (JAN)

0.4%

0.5%

Manufacturing Production (MoM) (JAN)

0.6%

1.0%

PMI Construction (FEB)

52.8

56.5

The Downside

Release

Expected

Actual

PPI Output (YoY) (FEB)

5.2%

5.3%

GDP (QoQ) (4Q P)

-0.5%

-0.6%

Total Business Investment (QoQ) (4Q P)

-0.4%

-2.5%

As building activity in the U.K. accelerates, with businesses increasing their rate of production, firms may expand their labor force throughout the year as the economic recovery gradually gathers pace. However, as U.K. firms face rising costs, the unexpected economic contraction in the fourth quarter could bear down on business sentiment, and another drop in employment is likely to reinforce a weakened outlook for the region as private sector consumption remains one of the leading drivers of growth. In response, the BoE may retain a neutral policy stance throughout the first-half of 2011, but there could be a growing shift within the MPC as the central bank’s credibility to ensure price stability comes under scrutiny.

Potential Price Targets For The Release

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

How To Trade This Event Risk

Forecasts for another rise in unemployment certainly reinforces a bearish outlook for the sterling, but an enhanced labor report could set the stage for a long British Pound trade as growth prospects improve. As a result, if claims for unemployment benefit unexpectedly contract from the previous month, we will need to see a green, five-minute candle following the release to establish a buy entry on two-lots of GBP/USD. Once these conditions are met, we will place the initial stop at the nearby swing low or a reasonable distance from the entry, and this risk will generate our first objective. The second target will be based on discretion, and we will move the stop on the second lot to cost once the first trade reaches its mark in order to preserve our profits.

On the other hand, the businesses may curb their willingness to expand their labor as they face rising energy prices paired with the ongoing weakness in the private sector, and the recent selloff in the exchange rate may gather pace as investors scale back speculation for higher borrowing costs in the U.K. Therefore, if jobless claims increase 1.5K or greater in February, we will implement the same strategy for a short pound-dollar trade as the long position laid out above, just in the opposite direction.

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)

Jan 2011

02/16/2011 9:30 GMT

-3.0K

2.4K

-49

-62

January 2011 Jobless Claims Change

Jobless claims in the U.K. unexpectedly increased 2.4K in January slipping 3.4K in the previous month, while the claimant count rate held steady at 4.5% for the eighth consecutive month. A deeper look at the report showed average weekly earnings excluding bonuses increased 1.8% during the three-months through December amid forecasts for a 2.0% expansion, while the jobless rate using the International Labour Organization’s methodology stayed pat at 7.9% during the same period. As economic activity in Britain unexpectedly contracts in the fourth quarter, the ongoing weakness within the private may lead the Bank of England to support the real economy throughout the first-half of 2011, and the central bank may retain a neutral outlook for future policy as it aims to balance the risks for the region. Indeed, currency traders showed little reaction to the data as the Bank of England was scheduled to release its quarterly inflation report at 10:30 GMT, but the GBP/USD bounced back from a low of 1.5986

GBPUSD_Trading_the_Change_in_U.K._Jobless_Claims_body_ScreenShot018.png, GBP/USD: Trading the Change in U.K. Jobless Claims

Questions? Comments? Join us in the DailyFX Forum

Join Technical Currency Strategist Joel Kruger in the DailyFX Trading Room to cover the event LIVE!

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

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

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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