Forex Trading Guide: U.K. Jobs Report

It’s a jam-packed trading week, so let’s start coming up with plans to trade the big events! In this edition of my Forex Trading Guide, we’ll take a look at the U.K. jobs report scheduled to be released tomorrow 8:30 am GMT.

What is this report all about?

The U.K. jobs report is composed of two main components:

1. The claimant count change is the number of people claiming unemployment-related benefits every month. A number that is lower than the previous figure or lower than the estimated count means there’s a fewer number of unemployed people, which is better for the U.K. economy.

2. The unemployment rate measures the number of unemployed workers as a percentage of the U.K. labor force. Similar to the claimant count, a lower figure compared to the previous one or the estimate is good for the U.K. economy.

Why is this report significant?

Aside from the fact that a better jobs market situation translates to stronger spending and growth, this particular report is on the watch list of most forex traders because the Bank of England (BOE) has specified that sustained improvements in hiring could convince them to tighten monetary policy. In particular, BOE Governor Carney mentioned that policymakers could start considering hiking rates once the jobless rate falls below their 7% threshold.

On top of that, the BOE is considered one of the more hawkish major central banks, as the IMF recently upped their GDP forecast for the U.K. economy, which is on track to post the fastest pace of growth among the G7 nations for this year. Carney also stated that the BOE is likely to hike rates before the U.K. general elections in May 2015, and a strong jobs report would support this upbeat outlook. On the flip side, a very weak jobs reading would undermine the positive forecasts for the U.K. economy and BOE monetary policy.

How could the British pound react?

The claimant count is expected to drop by 30.2K in March, a slower pace of decline compared to the previous 34.6K drop. This might be enough to keep the U.K. jobless rate steady at 7.2% and allow the pound to post decent gains. A much larger drop in claimants might move the jobless rate a notch closer to the BOE’s 7% target and this would give the pound a strong boost, possibly allowing GBP/USD to break its previous highs around the 1.6800 area. On the other hand, a lower than expected decline in claimants could force the pound to return some of its recent gains.

If you’re planning to trade the actual release, you should remember that GBP/USD tends to consolidate or form an Asian box a few hours leading up to the event, as I discussed in myprevious forex trading guide for the U.K. jobs report. If you’re brave enough and you have a solid risk management strategy in place, then you could set straddle orders outside the box to catch the initial reaction. Another option is to wait for the initial reaction to play out then hop in on a small pullback.

Volatility typically picks up minutes before the report is printed, as traders try to set their orders to bet on the direction of the reaction. If volatile price action ain’t your cup of tea, then I suggest you sit on the sidelines during this event!