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GBP/USD Rebound to Fizzle on Slowing U.K. Wage Growth

GBP/USD Rebound to Fizzle on Slowing U.K. Wage Growth

2016-04-20 04:00:00
David Song, Currency Strategist
Share:

- U.K. Jobless Claims to Contract for Fifth Consecutive Month.

- Average Weekly Earnings ex. Bonus to Slow for First Time Since November.

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Trading the News: U.K. Jobless Claims Change

Despite expectations for another 10.0K decline in U.K. Jobless Claims, a slowdown in household earnings may undermine the near-term advance in GBP/USD as it drags on interest-rate expectations.

What’s Expected:

DailyFX Calendar

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Why Is This Event Important:

Even though the Bank of England (BoE) remains upbeat on the U.K. economy, signs of weak wage growth may encourage Governor Mark Carney to retain the record-low interest rate throughout 2016 as the central bank struggles to achieve its 2% target for inflation.

Expectations: Bullish Argument/Scenario

Release

Expected

Actual

Gross Domestic Product (YoY) (4Q F)

1.9%

2.1%

Lloyds Business Barometer (MAR)

--

43

Retail Sales ex. Auto Fuel (MoM) (FEB)

-1.0%

-0.2%

Signs of a stronger-than-expected recovery accompanied by the pickup in business sentiment may boost job/wage growth, and a positive development may heighten the appeal of the sterling as it puts pressure on the BoE to normalize monetary policy sooner rather than later.

Risk: Bearish Argument/Scenario

Release

Expected

Actual

Construction Output s.a. (MoM) (FEB)

0.0%

-0.3%

Manufacturing Production (MoM) (FEB)

-0.2%

-1.1%

Trade Balance (FEB)

-3.400B

-4.840B

Nevertheless, the slowdown in global growth paired with easing outputs may drag on the labor market, and a dismal employment report may drag on the exchange rate as market participants push out bets for a BoE rate-hike.

How To Trade This Event Risk(Video)

Bullish GBP Trade: U.K. Job/Wage Growth Beat Market Expectations

  • Need green, five-minute candle following the print to consider a long GBP/USD trade.
  • If market reaction favors buying sterling, long GBP/USD with two separate position.
  • Set stop at the near-by swing low/reasonable distance from entry; look for at least 1:1 risk-to-reward.
  • Move stop to entry on remaining position once initial target is hit, set reasonable limit.

Bearish GBP Trade: Jobless Claims, Average Hourly Earnings Disappoint

  • Need red, five-minute candle to favor a short GBP/USD trade.
  • Implement same setup as the bullish British Pound trade, just in reverse.

Potential Price Targets For The Release

GBPUSD Daily

GBP/USD Daily Chart

Chart - Created Using FXCM Marketscope 2.0

  • Even though GBP/USD largely retains the downward trend carried over from late-August, the bullish divergence in the Relative Strength Index (RSI) may spur a larger correction especially as the pair appears to be carving an inverse head-and-shoulders patter in 2016.
  • Interim Resistance: 1.4910 (61.8% retracement) to 1.4930 (38.2% expansion)
  • Interim Support: 1.3870 (78.6% expansion) and 1.3960 (50% expansion)

Avoid the pitfalls of trading by steering clear of classic mistakes. Review these principles in the "Traits of Successful Traders" series.

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

Period

Data Released

Estimate

Actual

Pips Change

(1 Hour post event )

Pips Change

(End of Day post event)

FEB

2016

03/16/2016 09:30 GMT

-9.1K

-18.0K

-14

+135

February 2016 U.K. Jobless Claims Change

GBP/USD Chart

U.K. Jobless Claims slipped another 18.0K in February following a revised 28.4K contraction the month prior, while the Unemployment Rate under the International Labour Organization’s methodology head steady at an annualized 5.1% for the third-consecutive month in January. Moreover, household earnings also beat market expectations as Average Weekly Earnings excluding bonuses climbed to an annualized 2.2% from 2.0% during the same period. Even though the Bank of England (BoE) is widely anticipated to retain its current policy ahead of the U.K. Referendum in June, the ongoing improvement in the labor market may put increased pressure on the central bank to normalize monetary policy sooner rather than later as Governor Mark Carney sees a risk of overshooting the 2% inflation target over the policy horizon. The uptick in GBP/USD as short-lived, with the exchange consolidating ahead of the Fed’s March 16 interest rate decision, but the pair ended the day at 1.4255 as Chair Janet Yellen and Co. scaled back their interest-rate forecast.

Read More:

US DOLLAR Technical Analysis: Retesting 2016 Lows

EUR/JPY Technical Analysis: The Negative Rate Trend Line is Back

EUR/USD and USD/CHF Outside Weeks at Well-Defined Levels

Big Test For Spoos, Big Test For the Markets

Get our top trading opportunities of 2016 HERE

--- Written by David Song, Currency Analyst

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

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