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Faster U.K. Wage Growth to Fuel GBP/USD Recovery

Faster U.K. Wage Growth to Fuel GBP/USD Recovery

2017-01-18 05:00:00
David Song, Strategist
Share:

- U.K. Jobless Claims to Increase for Fifth Consecutive Month in December.

- Average Hourly Earnings to Climb Annualized 2.6%- Fastest Since September 2015.

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

Trading the News: U.K. Jobless Claims Change

Another 5.0K rise in U.K. Jobless Claims may produce near-term headwinds for the British Pound as it casts a weakened outlook for growth, but signs of stronger wage growth may undermine the bearish sentiment surrounding sterling as the Bank of England (BoE) changes its tune for monetary policy.

What’s Expected:

DailyFX Calendar

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Why Is This Event Important:

Heightening price pressures in the U.K. may prompt the BoE to adopt a more hawkish tone in 2017 especially as Governor Mark Carney anticipates a ‘notable increase in inflation,’ and the central bank may show a greater willingness to gradually move away from its easing-cycle as officials warn ‘monetary policy can respond, in either direction, to changes to the economic outlook as they unfold to ensure a sustainable return of inflation to the 2% target.’ However, the Monetary Policy Committee (MPC) may have little choice but to tolerate above-target inflation especially as the U.K. prepares to leave the European Union, and a batch of mixed data prints may spark a limited market reaction as the BoE looks poised to retain the current policy at the next ‘Super Thursday’ interest rate decision on February 2.

Expectations: Bullish Argument/Scenario

Release

Expected

Actual

Producer Price Index- Output Core n.s.a. (YoY) (DEC)

2.2%

2.1%

Manufacturing Production (MoM) (NOV)

0.5%

1.3%

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

0.0%

0.5%

Easing factory-gate prices accompanied by the pickup in retail spending may encourage U.K. firms to expand their labor force, and data prints pointing to stronger job/wage growth may spark a bullish reaction as it boosts interest-rate expectations.

Risk: Bearish Argument/Scenario

Release

Expected

Actual

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

0.2%

-0.2%

Trade Balance (NOV)

-3.500B

-4.167B

Mortgage Approvals (NOV)

68.5K

67.5K

However, the slowdown in building activity paired with slowing demands from abroad may drag on employment, and a dismal development may undermine the near-term rebound in GBP/USD as puts pressure on the BoE to further support the real economy.

For More Updates, Join DailyFX Currency Analyst David Song for LIVE Analysis!

How To Trade This Event Risk(Video)

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

  • Need green, five-minute candle following the rate-decision to consider a long GBP/USD position.
  • 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.

Bearish GBP Trade: Jobless Claims Expands 5.0K or Greater, Household Earnings Remain Subdued

  • 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

GBP/USD Daily

GBP/USD Daily Chart

Chart - Created Using Trading View

  • GBP/USD may stage a larger recovery over the coming days as the pair marks another failed run at the ‘flash crash’ low (1.1905), with the pound-dollar breaking out of the bearish trend carried over from December; will keep a close eye on the topside targets as the Relative Strength Index (RSI) highlights a similar dynamic and appears to be turning around ahead of oversold territory.
  • 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 GBP/USD 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)

NOV

2016

12/14/2016 09:30 GMT

6.5K

2.4K

-1

-95

November 2016 U.K. Jobless Claims Change

GBP/USD 5-Minute

Faster U.K. Wage Growth to Fuel GBP/USD Recovery

Chart - Created Using Trading View

U.K. Jobless Claims increased another 2.4K in November after climbing a revised 13.3K the month prior, while the jobless rate under the International Labour Organization’s methodology held steady at an annualized 4.8% for the second consecutive month in October. Moreover, employment unexpectedly narrowed 6K during the three-months through October amid forecasts for a 50K rise, while Average Hourly Earnings climbed an annualized 2.5% during the same period after advancing a revised 2.4% in September. The British Pound edged lower following the series of mixed data prints, with GBP/USD coming under increased selling pressure during the North American trade, with the pair ending the day at 1.2561.

If you’re looking for trading ideas, check out our Trading Guides.

Read More:

COT-Crude Oil Positioning Remains Extreme

Crude Oil Price Forecast: Oil’s Impressive Polarity Zone Pivot

Silver Price Resistance and Dollar Support Confluence

USD/CAD at Risk for Further Losses Sub-1.33

--- Written by David Song, Currency Analyst

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

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