The U.K. labor market is widely anticipated to weaken further in July, with economists forecasting jobless claims to rise 28.0K from the previous month, and fears of a slower recovery could drag on the exchange rate as investors weigh the outlook for a sustainable recovery.
[B][U]Trading the News: U.K. Jobless Claims Change[/U][/B]
[B][U]
[/U][/B]
[B][U]What’s Expected[/U][/B]
Time of release: [B]08/12/2009 08:30 GMT, 04:30 EST[/B]
Primary Pair Impact[B] : GBPUSD[/B]
Expected: 28.0K
Previous: 23.8K
[B][U]
[/U][/B]
[B][U]Effects the change in Jobless Claims had over GBPUSD for the past 2 months[/U][/B]
[U]June 2009 [/U][U]U.K.[/U][U] Jobless Claims Change[/U]
Claims for unemployment benefits in the U.K. increased 23.8K in June to a 12-year high of 1.56M amid expectations for a 41.3K rise, and the labor market may continue to weaken throughout the second-half of the year as businesses scale back on production and employment in order to weather the downturn in global trade. At the same time, the claimant count rate tipped higher to an annualized rate of 4.8% from a revised reading of 4.7% in June, while the ILO’s gauge for unemployment jumped to 7.6% from 7.2% April, which is the highest since 1995, and the unprecedented steps taken on by the government should help to taper the downside risks for growth and inflation as policymakers expect an economic recovery later this year. As a result, the Bank of England may continue to maintain its current policy in place as the central bank holds an improved outlook for future growth.
[U]
May 2009 U.K. Jobless Claims Change[/U]
Jobless claims in the U.K. increased 39.3K to 1.54M in May amid expectations for a 60.0K jump in unemployment, and the enhanced labor report suggests the economic downturn could be nearing a bottom as policymakers take unprecedented steps to stimulate the ailing economy. At the same time, the claimant count rate increased for the fifteenth month in May to 4.8% from 4.6% in the previous month, which is the highest since July 1997, and the downturn in the labor market may continue to weigh on economic activity going forward as households face the worst recession in over half a century. As a result, the Bank of England is widely expected to hold the benchmark interest rate over the near-term, and market participants speculate that the central bank will expand its asset purchase program in the second half of the year in an effort to jump-start the ailing economy.
[B]
What To Look For Before The Release[/B][B][/B]
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:
[B][U]Bullish Scenario:[/U][/B]
[B][U][/U][/B]
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.
[B][U]Bearish Scenario:[/U][/B]
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.
[B]
How To Trade This Event Risk[/B]
The U.K. labor market is widely anticipated to weaken further in July, with economists forecasting jobless claims to rise 28.0K from the previous month, and fears of a slower recovery could drag on the exchange rate as investors weigh the outlook for a sustainable recovery. The advanced 2Q GDP reading reinforced a weakening outlook for Europe’s second largest economy, with the annual rate of growth contracting 5.6% from the previous year to mark the biggest decline since recordkeeping began in 1955, and concerns of a protracted downturn may continue to weigh on economic activity going forward as households face a weakening labor market paired with tightening credit conditions. A report by the Bank of England showed home equity withdrawals fell at a record pace during the first quarter, while consumer credit unexpectedly slipped to 0.1B from a revised reading of 0.2B in May, and the data foreshadows a dour outlook for private-sector spending, which is one of the biggest drivers of growth, as banks remain reluctant to lend. At the same time, a report by the National Institute of Economic and Social Research said economic activity declined at a slower pace during the three-months though July, with the International Monetary Fund raising its 2010 growth expectations to 0.2% from an initial forecast of -0.4%, and turnaround in the economic projection reinforces an improved outlook for future growth as policymakers take unprecedented steps to soften the landing of the economy. Meanwhile, the Bank of England held the benchmark interest rate at 0.50% earlier this month, but unexpectedly expanded its asset purchase program by GBP 50B to GBP175B in an effort to maintain its 2% target for price growth, and went onto say that the economic downturn in the U.K. ‘appears to have been deeper than previously expected.’ At the same time, the central bank noted that ‘financial conditions remain fragile’ and went onto say that banks are ‘likely to restrict the availability of credit’ as they shore up their balance sheets, and the cautious tone held by the MPC suggests the BoE will keep borrowing costs at the record-low throughout the first-half of the following year in an effort to foster a sustainable recovery. However, Credit Suisse overnight index swaps show investors are pricing a 100bp rate hike over the next 12-months, and the rise in market sentiment paired with long-term expectations for higher interest rates could drive the British pound higher throughout the remainder of the year.
Trading the given event risk favors a bearish outlook for Cable as market participants anticipate jobless claims in the U.K. to rise 28.0K in June but nevertheless, the less-than-expected rise during the last three-months has left the door open for an enhanced labor report. Therefore, if unemployment rises 18.0K or less in June, we will look for a green, five-minute candle following the release to generate a buy entry on two-lots of GBP/USD. Once these conditions are met, we will place our initial stop at the nearby swing low (or reasonable distance), and this risk will establish our first objective. Our second target will be based on discretion, and we will move the stop on the second-lot to breakeven once the first trade reaches its target in order to lock-in our profits.
On the other hand, tightening credit conditions paired with the slump in global trade may lead businesses to take further steps to lower their cost structure, and a dismal employment report could weigh on the exchange rate as investors weigh the outlook for a sustainable recovery. As a result, if jobless claims rise 28.0K or greater in June, we will favor a bearish forecast for the Sterling, and will follow the same strategy for a short pound-dollar trade as the long position mentioned above, just in reverse.
[I][B]Visit the [/B][/I][I][B]DailyFX Forex Stream[/B][/I] [I][B]for Real-Time News and Market Updates[/B][/I]