The U.K. labor market is widely anticipated to weaken throughout the second half of the year as economists forecast jobless claims to rise 25.0K in August, and fears of a slower recovery may weigh on the exchange rate as the Bank of England anticipates the annual rate of unemployment to push higher even after the economy emerges from the worst recession since the post-war period.
[B][U]Trading the News: U.K. Jobless Claims Change[/U][/B]
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[B][U]What’s Expected[/U][/B]
Time of release: [B]09/16/2009 08:30 GMT, 04:30 EST[/B]
Primary Pair Impact[B] : GBPUSD[/B]
Expected: 28.0K
Previous: 23.8K
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[B][U]Effects the change in U.K Jobless Claims has had over GBPUSD for the past 2 months[/U][/B]
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[U]August 2009 [/U][U]U.K.[/U][U] Jobless Claims Change[/U]
Jobless claims in the U.K. increased 24.9K to 2.44M in July amid expectations for at 28.0K rise, which is the highest level of unemployment since 1995, and the labor market is likely to weaken further over the coming months as businesses continue to scale back on production and employment in order to lower their cost structure. As a result, the claimant count rate increased to 4.9% from 4.8% in June, which was in-line, with expectations, while the International Labor Organization’s gauge for unemployment jumped to 7.8% from 7.6% to top expectations for a rise to 7.7%, and the downturn in the labor market is likely to weigh on economic activity going forward as private-sector spending falters. At the same time, the Bank of England anticipates the jobless rate to push higher even after the economy emerges from the recession, and continued to see a risk for a slower recovery as households face tightening credit conditions.
[U]June 2009 U.K. 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.
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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]
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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.
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How To Trade This Event Risk[/B]
The U.K. labor market is widely anticipated to weaken throughout the second half of the year as economists forecast jobless claims to rise 25.0K in August, and fears of a slower recovery may weigh on the exchange rate as the Bank of England anticipates the annual rate of unemployment to push higher even after the economy emerges from the worst recession since the post-war period. At the same time, the preliminary 2Q GDP reading encouraged an improved outlook for future growth as the economy contracted at a slower pace than initial expected, with private and public spending crossing the wires stronger than projected, and the extraordinary efforts taken on by the government should help to stem the downside risks for growth and inflation as the central bank utilizes tools beyond the interest rate to stimulate the ailing economy. A report by the National Institute of Economic and Social Research showed the GDP forecast increased 0.2% in August to mark the first rise since May 2008, while the International Monetary Fund raised its growth outlook for the nation and expects the economy to expand at an annual rate of 0.2% in 2010, and the improvement in the economic landscape should help to bolster demands for employment following the rebound in business confidence. Moreover, Bank of England Deputy Governor Charles Bean said downward wages pressures have helped to limit the drop in employment, and stated that the “rate of job losses might be starting to ease off” as policy makers anticipate economic activity to improve throughout the second-half of the year. However, Governor Mervyn King maintained a weakened outlook for the economy and continued to see a risk for a slower recovery as the banking system remains fragile, and the slump in credit lendingmay continue to weigh on economic activity going forward as businesses take steps to lower their cost structure. In addition, Mr. King went onto say banks will need to shore up their capital holdings as he expects loan losses to intensify over the coming months, and discussed the possibility of lowering the deposit rate for reserves in an effort to foster bank lending, and policy makers may take additional steps to stimulate the ailing economy as the outlook for growth and inflation remains weak.
Expectations for higher unemployment favors a bearish outlook for Cable as the central bank maintains a dovish policy stance but nevertheless, the less-than-expected rise during the last four-months has left the door open for an enhanced labor report. Therefore, if jobless claims rise 18.0K or less in August, we will look for a green, five-minute candle subsequent to the release to generate a buy order on two-lots of GBP/USD. Once these conditions are met, we will set our initial stop at the nearby swing low (or reasonable distance), and this risk will establish our first target. Our second objective 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, the slump in global trade paired with tightening credit conditions may lead businesses to take additional steps to lower their cost structure, and a dismal labor report is likely to weigh on the exchange rate as investors weigh the outlook for a sustainable recovery. As a result, if claims for unemployment benefits rise 28.0K or more in August, 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.
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[I]To discuss this report contact David Song, Currency Analyst: <[email protected]>[/I]