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

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

2011-10-10 20:17:00
David Song, Currency Strategist
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Trading the News: U.K. Jobless Claims Change

What’s Expected:

Time of release: 10/12/20118:30 GMT, 4:30 EST

Primary Pair Impact:GBPUSD

Expected: 24.0K

Previous: 20.3K

DailyFX Forecast: 15.0K to 35.0K

Why Is This Event Important:

Jobless claims in the U.K. are projected increase another 24.0K in September following the 20.3K rise in the previous month, and the ongoing weakness in the labor market may weigh on the exchange rate as it dampens the outlook for future growth. As the slowing recovery in Britain raises the risk of a double-dip recession, we saw the Bank of England unexpectedly expand its asset purchase program to GBP 275B, and the central bank may keep the door open to expand monetary policy further as the central bank sees an increased risk of undershooting the 2% target for inflation. However, the preemptive approach to shield the U.K. economy may lead the BoE to adopt a wait-and-see approach for the remainder of the year, and the central bank may conclude its easing cycle in 2012 as policy makers expect to see economic activity gather pace over the coming months.

Recent Economic Developments

The Upside

Release

Expected

Actual

Gross Fixed Capital Formation (2Q)

0.7%

1.7%

Total Business Investments (2Q)

--

11.6%

Purchasing Manager Index – Services (SEP)

50.5

52.9

The Downside

Release

Expected

Actual

Producer Price Index - Input (YoY) (SEP)

17.1%

17.5%

Producer Price Index - Output (YoY) (SEP)

6.2%

6.3%

Gross Domestic Product (QoQ) (2Q F)

0.2%

0.1%

The rise in business investments paired with the expansion is service-based activity may generate a positive employment report, and an improvement in the U.K. labor market may lead the GBP/USD to break out of its current range as the data raises the prospects for future growth. However, firms in the U.K. may continue to keep a lid on their labor force as they face higher costs paired with the slowdown in economic activity, and the BoE may preserve a cautious outlook for the economy as it faces an increased risk of slipping back into a recession. In turn, we may see a sharp reversal in the GBP/USD, and the exchange rate may threaten the rebound from 1.5273 as the fundamental outlook for the U.K. deteriorates.

Potential Price Targets For The Release

GBPUSD_Trading_the_U.K._Jobless_Claims_Report_body_ScreenShot009.png, GBP/USD: Trading the U.K. Jobless Claims Report

How To Trade This Event Risk

Expectations for a seventh consecutive rise in U.K. jobless claims encourages a bearish outlook for the sterling, but a better-than-expected print could pave the way for a long British Pound trade as it raises the outlook for future growth. Therefore, if claims increase less than 15K in September, we will need to see a green, five-minute candle following the release to generate 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 establish 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.

In contrast, the heightening risk of a double-dip recession paired with the slowdown in global trade may lead businesses to scale back on hiring, and a dismal labor report is likely to weigh on the exchange rate as growth prospects deteriorate. Therefore, if claims increase by 24.0K or greater from the previous month, we will implement the same setup for a short pound-dollar trade as the short 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)

AUG 2011

09/14/2011 8:30 GMT

35.0K

20.3K

+11

+22

August 2011 Jobless Claims Change

Claims for unemployment benefits increase another 20.3K in August after rising a revised 33.7K in the previous month, while the claimant count rate unexpectedly held steady at 4.9% for the second month. A deeper look at the report showed public sector employment tumbled a record 110K during the three-months through June, while private sector jobs increased 41.0K during the same period. As the slowing recovery in the U.K. raises the risk of a double-dip recession, the Bank of England may step up its efforts to stimulate the ailing economy, and the central bank may carry its easing cycle into the following year as policy makers see a risk of undershooting the 2% target for inflation. The better-than-expected print sparked a bullish reaction in the British Pound, with the GBP/USD paring the decline to 1.5731, and the sterling continued to regain its footing during the North American trade as the exchange rate settled at 1.5765 at the end of the day.

GBPUSD_Trading_the_U.K._Jobless_Claims_Report_body_ScreenShot008.png, GBP/USD: Trading the U.K. Jobless Claims Report

--- Written by David Song, Currency Analyst

To contact David, e-mail dsong@dailyfx.com. Follow me on Twitter at @DavidJSong

To be added to David's e-mail distribution list, send an e-mail with subject line "Distribution List" to dsong@dailyfx.com.

Questions? Comments? Join us in the DailyFX Forum

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

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

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