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GBP/USD Weakness to Abate on Robust U.K. Job/Wage Growth

GBP/USD Weakness to Abate on Robust U.K. Job/Wage Growth

David Song, Strategist

- U.K. Jobless Claims to Increase for Third Consecutive Month in October.

- Household Earnings to Climb an Annualized 2.4% (Fastest Pace of Growth Since September 2015).

For more updates, sign up for David's e-mail distribution list.

Trading the News: U.K. Jobless Claims Change

GBP/USD may continue to carve a near-term series of lower highs & lows as U.K. Jobless Claims are projected to increase another 2.0K in October, but a marked pickup in household earnings may heighten the appeal of the British Pound as the Bank of England (BoE) warns ‘monetary policy can respond, in either direction.’

What’s Expected:

DailyFX Calendar

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Why Is This Event Important:

It seems as though the Monetary Policy Committee (MPC) is gradually move away from its easing cycle as Governor Mark Carney warns ‘inflation is going up. A pass through of a 20% fall in sterling is going to come and will build towards the end of this year and into 2017, and the sterling may stage a larger recovery over the near-term as BoE officials argue that ‘there are limits to the extent to which above-target inflation can be tolerated, Nevertheless, the MPC appears to be in no rush to remove the highly accommodative stance as the outlook for the U.K. economy remains clouded with high uncertainty, and the British Pound remains at risk of facing headwinds over the coming months as the region prepares to depart from the European Union (EU).

Expectations: Bearish Argument/Scenario

Release

Expected

Actual

Trade Balance (SEP)

-3.950B

-5.221B

Net Consumer Credit (SEP)

1.5B

1.4B

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

0.2%

0.0%

Waning demand at home and abroad may push U.K. firms to scale back on hiring, and a dismal employment report may trigger a bearish reaction in the sterling as it dampens the outlook for growth and inflation.

Risk: Bullish Argument/Scenario

Release

Expected

Actual

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

0.0%

0.3%

Manufacturing Production (MoM) (SEP)

0.4%

0.6%

Gross Domestic Product (YoY) (3Q A)

2.1%

2.3%

Nevertheless, the pickup in business output accompanied by the expansion in building activity may foster a further improvement in job/wage growth, and a positive development may encourage a larger relief rally in GBP/USD as market participants scale back bets for additional monetary support.

How To Trade This Event Risk(Video)

Bearish GBP Trade: Job & Wage Growth Falls Short of Market Forecasts

  • Need red, five-minute candle following the report to favor a short GBP/USD trade.
  • If market reaction favors a long sterling trade, buy 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.

Bullish GBP Trade: U.K. Employment Report Beats Expectations

  • Need green, five-minute candle to favor a long GBP/USD position.
  • Implement same setup as the bearish British Pound trade, just in reverse.

Potential Price Targets For The Release

GBP/USD Daily

GBP/USD Daily Chart

Chart - Created Using Trading View

  • Will keep a close eye on the recent series of lower highs & lows in GBP/USD following the failed attempt to push above the Fibonacci overlap around 1.2630 (38.2% expansion) to 1.2680 (50% retracement), with the pair at risk of testing channel support especially as the Relative Strength Index (RSI) preserves the bearish formation carried over from May.
  • Interim Resistance: 1.2920 (100% expansion) to 1.2950 (23.6% expansion)
  • Interim Support: 1.1905 (2016-low) and 1.2100 (61.8% expansion)

Check out the short-term technical levels that matter for EUR/GBP heading into the report!

Impact that the U.K. Jobless Claims report 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)

SEP

2016

10/19/2016 08:30 GMT

3.2K

0.7K

+9

-19

September 2016 U.K. Jobless Claims Change

GBP/USD 5-Minute

GBP/USD Chart

Claims for unemployment benefits increased 0.7K September after rising a revised 7.1K the month prior, while Average Weekly Earnings excluding Bonuses climbed an annualized 2.3% during the three-months through August after expanding 2.2% in the previous month. A deeper look at the report showed the U.K. economy added 106K jobs amid forecasts for a 76K rise, and the underlying strength in the labor market may encourage the Bank of England (BoE) to retain the current policy throughout the remainder of 2016 as Governor Mark Carney and Co. see a greater threat of overshooting the 2% target for inflation over the policy horizon. Despite the limited market reaction, the British Pound struggled to hold its ground throughout the session, with GBP/USD closing the day at 1.2283.

Get our top trading opportunities of 2016 HERE

Read More:

US Dollar Whiplash Ends with a Trump Bump

GBP/JPY Technical Analysis: New Trend in Play after 800-Pip, 3-Day Romp

USD/CAD Technical Analysis: Pending Trade Talks & U.S. Inflation Weakens CAD

S&P 500 - Bears Got Trumpled, Short-term Trading Levels Noted

--- 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, please follow this link.

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

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