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Trading News Report

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GBP/USD: Trading the U.K. Jobless Claims Change Report

Tue, Mar 17 2009, 06:02 GMT
by Daily FX Research Team

DailyFX

The British pound is likely to face increased selling pressure over the week as economists forecast jobless claims in the U.K. to rise another 84.8K in February, and the labor market is likely to weaken further throughout the year as Europe’s second largest economy is expected to face its worst recession since World War II.

Trading the News: U.K. Jobless Claims Change

What’s Expected

Time of release: 03/18/2009 09:30 GMT, 05:30 EST

Primary Pair Impact : GBPUSD

Expected: 84.8K

Previous: 73.8K

Effects the change in Jobless Claims had over GBPUSD for the past 2 months

January 2009 U.K. Jobless Claims Change

Jobless claims in the U.K. increased 73.8K to 1.23M in January, which is the highest level since July 1999, and conditions are likely to get worse in the months ahead as the International Monetary Fund expect the economy to face its worst economic downturn since 1946. BoE Governor Mervyn King said that he expects the U.K. to face a ‘deep recession’ this year as the MPC forecasts the economy to contract at an annualized pace of 4.0% in the first quarter, and as the outlook for growth and inflation remains bleak, policy makers in the region are likely to adopt unconventional measures to stimulate the ailing economy as the benchmark interest rate holds at its lowest level since the central bank was founded in 1694. As market participants expect the BoE to keep borrowing costs at the record low for some time, deteriorating fundamentals are likely to weigh on the exchange rate.

December 2008 U.K. Jobless Claims Change

Claims for unemployment benefits in the U.K. increased 77.9K in December to 1.16M, which is the highest level since 2000, and raised the annual rate of unemployment to 3.6% from 3.3% in the previous month. The data continues to foreshadow a deepening recession throughout the region as the labor market deteriorates at a record pace, and conditions are likely to only get worse as the European Commission forecasts the economy to contract 2.8% this year, which would the lowest level of growth since 1946. As a result, the Bank of England is expected to ease policy further at next month’s policy meeting in an effort to steer the economy out of the recession, and the extraordinary efforts taken on by policy makers should help to stem the downside risks for growth, but as the IMF forecasts a global recession for 2009, the outlook for improved growth remains bleak.

What To Look For Before The Release

Traders with access to market depth information via the FXCM Active Trader Platform may use it to gauge the potency of the economic data release as well as to shed some light on the market’s directional bias. Increasing volume ahead of the announcement will telegraph likely follow-through behind whatever move is to materialize, while an imbalance in available liquidity on the Bid versus the Offer side of the market will tell us the direction major institutions are likely favoring ahead of the announcement:

Bullish Scenario:

If we see substantially deeper available liquidity on the Bid side of the market, this tells us that major price providers in the market are looking to buy the GBP against the US Dollar. Considering that close to 60% of all FX market volume is cleared through just six top banks, we see it prudent to be on the same side of the trade as major institutions and will favor a bullish bias on GBPUSD ahead of the data release.

Bearish Scenario:

If we see substantially deeper available liquidity on the Offer side of the market, this tells us that major price providers in the market are looking to sell the GBP against the US Dollar. Considering that close to 60% of all FX market volume is cleared through just six top banks, we see it prudent to be on the same side of the trade as major institutions and will favor a bearish bias on GBPUSD ahead of the data release.

How To Trade This Event Risk

The British pound is likely to face increased selling pressure over the week as economists forecast jobless claims in the U.K. to rise another 84.8K in February, and the labor market is likely to weaken further throughout the year as Europe’s second largest economy is expected to face its worst recession since World War II. The preliminary GDP report for the region showed that the annual rate of growth contracted 1.9% in the fourth quarter, which was the biggest drop since 1980, and conditions are likely to get worse in the months ahead as firms continue to cut back on production and employment in an effort to reduce costs. A report by the Office of National Statistics showed that manufacturing outputs plunged 6.4% during the three-months through January, which is the biggest decline since recordkeeping began in 1968, while a separate report showed that business investments slipped another 3.9% in the fourth quarter after falling 2.1% in the previous quarter. The data continues to reinforce fears of a deepening recession as households face fading demands for employment paired with increased turmoil in the banking sector, and as the Bank of England holds a dour outlook for growth and inflation, policy makers are likely to step up their efforts in an attempt to soften the landing of the economy. As the MPC forecasts the annual rate of growth to contract 4.0% in the first quarter and projects price growth to reach 0.5% by the end of 2010, the central bank is likely to use all of their available tools to stimulate the economy as the board maintains their dual mandate to ensure price stability while fostering economic activity. At the same time, we may see the BoE expand its policy for quantitative easing as the benchmark interest rate holds at a record low, and may purchase a broad array of securities in the months ahead as credit conditions remain far from normal. Nevertheless, as the board sets up a three-month timeframe to carry out the new policy objectives, fundamental headwinds are likely to weigh on the exchange rate as economic activity deteriorates at a record pace, and the Sterling is expected to hold its bearish trend against the greenback as the reserve currency continues to benefit from safe-haven flows.

Trading the given event risk clearly favors a bearish forecast for the British pound as economists expect claims for unemployment benefits to rise another 84.8K in February however, an enhanced labor report would certainly set the stage for a long pound trade following the release.
Therefore, if jobless claims rises less than 80.0K during the month, we will look for a green, five-minute candle subsequent to the event to confirm a buy entry on two lots of GBPUSD. Once these conditions are met, we will place our initial stop at the nearby swing low (or reasonable distance taking volatility into account), and this risk will determine our first target.

Conversely, fading demands from home and abroad paired with expectations for a global recession is likely to weigh on businesses, and as firms slash their labor force in an effort to reduce costs, claims for unemployment benefits are likely to trend higher throughout the year. As a result, an in-line print or a rise of more than 84.8K in jobless claims will favor a bearish outlook for the British, and we will follow the same strategy for a short pound-dollar trade as the long position mentioned above, just in reverse.

Published on  Tue, Mar 17 2009, 06:12 GMT