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GBP/USD: Trading the U.K. Jobless Claims Report

GBP/USD: Trading the U.K. Jobless Claims Report

2011-08-15 19:51:00
David Song, Strategist
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Trading the News: U.K. Jobless Claims Change

What’s Expected:

Time of release: 08/17/2011 8:30 GMT, 4:30 EST

Primary Pair Impact: GBPUSD

Expected: 20.0K

Previous: 24.5K

DailyFX Forecast: 10.0K to 35.0K

Why Is This Event Important:

Jobless claims in the U.K. are projected increase another 20.0K following the 24.5 expansion in June, and the ongoing weakness within the labor market could spark a bearish reaction in the British Pound as the data reinforces a weakened outlook for future growth. However, the Bank of England meeting minutes may take center stage should the policy statement show a growing shift within the Monetary Policy Committee, and central bank Governor Mervyn King may show an greater willingness to increase its asset purchases in an effort to stimulate the ailing economy. On the other hand, market participants may show a greater reaction to the labor report should the minutes reflect the same tone held in the quarterly inflation report, and the recent developments are likely to instill a bearish outlook for the sterling as growth prospects deteriorate.

Recent Economic Developments

The Upside

Release

Expected

Actual

Purchasing Manager Index Services (JUL)

53.2

55.4

Index of Services (MoM) (MAY)

0.8%

1.6%

Retail Sales ex Auto Fuel (MoM) (JUN)

0.5%

0.8%

The Downside

Release

Expected

Actual

Industrial Production (MoM) (JUN)

0.4%

0.0%

Manufacturing Production (MoM) (JUN)

0.2%

-0.4%

Gross Domestic Product (QoQ) (JUN)

0.2%

0.2%

The faster pace of expansion in service-based activity paired with the rebound in private sector consumption may encourage businesses to increase their labor force, and an upbeat labor report could lead the GBP/USD to extend the advance carried over from the previous week as the recovery regains its footing. However, as firms scale back on production, the slowdown in economic activity could fuel a sharp decline in employment, and the near-term rebound in the pound-dollar may dissipate as the data heightens the risk for a double-dip recession. In turn, the BoE may carry the record-low interest rate into the following year, and the central bank may open the door to expand monetary policy further in an effort to balance the risks for the region.

Potential Price Targets For The Release

GBPUSD_Trading_the_U.K._Jobless_Claims_Report_body_ScreenShot016.png, GBP/USD: Trading the U.K. Jobless Claims Report

How To Trade This Event Risk

Expectations for a fifth consecutive rise in U.K. jobless claims reinforces a bearish outlook for the sterling, but a positive employment report could set the stage for a long British Pound trade as growth prospects improve. Therefore, if claims increase less than 10.0K or unexpectedly weaken 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 set the initial stop at the nearby swing low or a reasonable distance from the entry, 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 cost once the first trade reaches its market in an effort to protect our profits.

On the other hand, employment may weaken further in July as businesses scale back on production, and central bank may look to expand quantitative easing further in an effort to encourage a sustainable recovery. As a result, if unemployment claims increase 20.0K or greater from the previous month, we will implement the same strategy for a short pound-dollar trade as the long position laid out 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)

JUN 2011

07/13/2011 8:30 GMT

15.0K

24.5K

+11

+154

June 2011 Jobless Claims Change

Claims for unemployment benefits climbed another 24.5K in June after increasing 22.5K in the previous month, while average weekly earnings for May topped market forecast, with the headline reading advancing 2.3% versus forecasts for a 2.1% rise. As the government intends to cut 300K jobs in its effort to balance the budget deficit, the tough austerity measures are likely to exacerbate the downturn in employment, and the Bank of England may come under increased pressure to support the real economy as the region faces a heightening risk of a double-dip recession. In turn, the BoE may show a greater willingness to expand its asset purchase program beyond the GBP 200B target, and we may see a growing shift within the MPC as policy makers see a risk of undershooting the 2% target for inflation. The GBP/USD fell back towards 1.5900 following the larger-than-expected rise in U.K. jobless claims, but the initial reaction was certainly short-lived, with the pound-dollar pushing higher throughout the North American trade to close at 1.6101.

GBPUSD_Trading_the_U.K._Jobless_Claims_Report_body_ScreenShot015.png, GBP/USD: Trading the U.K. Jobless Claims Report

Questions? Comments? Join us in the DailyFX Forum

Join DailyFX 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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