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U.K. Jobless Claims Expected to Rise 40.0K, Will the Pound Fall Further?

Wed, Nov 12 2008, 06:41 GMT
by Daily FX Research Team

DailyFX

Employment opportunities in the U.K. is expected to deteriorate further in October as Europe’s second largest economy heads into a recession for the first time since 1991. Economists expect jobless claims to rise another 40.0K in October following the 31.8K increase in the prior month, increasing the risks of a severe downturn in the U.K.

Trading the News: U.K. Jobless Claims Change

What’s Expected

Time of release: 11/12/2008 09:30 GMT, 04:30 EST

Primary Pair Impact : GBPUSD Expected: 40.0K

Previous: 31.8K

Impact the U.K. Jobless Claims Change has had on GBPUSD after the last 3 releases

Unemployment claims in the U.K. increased 31.8K to 939,900 in September to reach its highest level since 2006. Fading growth prospects paired with slowing demands from the global economy has certainly pushed firms to cutback on employment, and conditions may only get worse as the U.K. heads into a recession. Fears of a global meltdown led the Bank of England to join the Fed and ECB in a coordinated rate cut on October 8th, and unexpectedly lowered the interest rate by 50bp to 4.50%. In addition, Prime Minister Gordon Brown has joined forces with the Treasury to provide a bailout package for financial institutions in U.K., and has called for additional support by foreign governments, including the IMF. Despite the extraordinary efforts by policy makers, the U.K. is expected to fall into a technical recession by the end of the year, and may lead the BoE to lower borrowing costs further in order to avoid a deep and prolonged recession.

August 2008 U.K. Jobless Claims Change

U.K. jobless claims rose as its fastest pace in 16 years as the number of unemployed increased 32.5K in August. Fading employment opportunities paired with the downturn in the housing and credit sector has certainly fueled concerns that the U.K. will slip into a recession for the first time since 1991, and has certainly raised speculation that the Bank of England will cut borrowing costs in the months ahead in order to curb the downside risks to growth. Meanwhile, increased turmoil in the global financial market will make it increasingly difficult for U.K. policy makers to avoid a severe downturn in the economy, which could lead the MPC to increase their efforts as fears of a global meltdown intensify. Moreover, MPC member Tim Besley dropped his hawkish bias as he voted to hold the benchmark interest rate steady at 5.00%, which has fueled expectations that the BoE will likely lower borrowing costs in October.

July 2008 U.K. Jobless Claims Change

Jobless claims in the U.K. rose 20.1K in July to record the biggest increase since 1992, and conditions may only get worse as Europe’s second largest economy teeters on the brink of a recession. Falling home prices paired with tightening credit conditions has certainly dragged on the economy, and the Bank of England may look to lower the benchmark interest rate in the coming months as the MPC turns their attention to the downside risks for growth. Governor Mervyn King stated that inflation could fall below the bank’s 2% target if they continued to hold the interest rate at 5.00%, and went on to say that ‘there is a possibility’ that the U.K. will face a technical recession by the end of the year. The dovish outlook held by Governor King suggests that the BoE will look to lower borrowing costs over the near-term as growth prospects deteriorate.

How To Trade This Event Risk

Employment opportunities in the U.K. is expected to deteriorate further in October as Europe’s second largest economy heads into a recession for the first time since 1991. Economists expect jobless claims to rise another 40.0K in October following the 31.8K increase in the prior month, increasing the risks of a severe downturn in the U.K. The economy contracted 0.5% in the third quarter after failing to grow in the previous quarter, and economic activity may weaken further over the coming months as growth prospects remain bleak. Manufacturing activity in Great Britain contracted for the sixth consecutive month in October as demands from home and abroad weakened throughout the second half of the year. In addition, the services PMI fell to its lowest level since recordkeeping began in 1996, and will certainly dampen the growth prospects for the U.K. as service-based activity accounts for nearly three-quarters of GDP. Fears of a deep and prolonged recession have intensified as home prices continue to tumble lower while economic activity remains weak, and could lead the Bank of England to lower borrowing costs even further despite the 150bp rate cut by the central bank last week. Credit Suisse overnight index swaps are showing that market participants have already raised bets that the BoE will lower the benchmark interest rate by nearly 75bp over the next 12 months, which suggests that investors remain bearish against the British pound. Expectations for further easing by the MPC is likely to spur a sell off in the Sterling over the near-term, and buying pressures for the currency may remain subdued well into the next year as fears of a global recession intensify.

Trading the given event risk may not be as clear as some of our other trades, but nevertheless, an unexpected improvement in the labor market would certainly favor a bullish-pound trade. Therefore, a better than expected release would set the stage for a long GBPUSD trade, and we will look for a green, five-minute candle following the release to confirm entry on two lots of the pound-dollar. Our initial stop will be placed at the nearby swing low (or reasonable distance), and this risk will determine our first target. Our second target will be based on discretion, and in order to preserve our profits, we will move the stop on the second lot to breakeven once the first lot reaches its target.

Conversely, the dour outlook for the U.K. paired with fears of a global meltdown could push firms to aggressively cutback on employment, which would certainly favor a bearish outlook for the British pound. Therefore, a job loss of 40.0K or higher would lead us to short the GBPUSD, and we will follow the same strategy for the short position as the long trade listed above, just in reverse.

Published on  Wed, Nov 12 2008, 06:52 GMT