Jobless claims in the U.K. are expected to fall 10.0K in January following the 15.2K contraction in the previous month, and the data is likely to spark increased volatility in the exchange rate as the Bank of England is scheduled to release its minutes from the February policy meeting at 9:30 GMT.
[U][B]Trading the News: U.K. Jobless Claims Change[/B][/U]
[U][B]What’s Expected[/B][/U]
Time of release: 02/17/2010 09:30 GMT, 04:30 EST
Primary Pair Impact : GBPUSD
Expected: -10.0K
Previous: -15.2K
[U][B]Effects the change in Jobless Claims has had over GBPUSD for the past 2 months[/B][/U]
[U]December 2009 U.K. Jobless Claims Change[/U]
U.K. jobless claims in December dived 15.2K from a downward revision of 10.8K the previous month amid economists’ expectations of 4.6K decline, the National Statistics said in London. The greater-than-expected drop in unemployment marks the biggest fall since April 2007, and conditions are likely to improve going forward as the expansion in monetary and fiscal policy continues to feed through the real economy. However, Bank of England Governor Mervyn King announced that unemployment is likely to remain high as the U.K. faces “a long period of healing” and remains in the “very early stage of the recovery.” Going forward, the central bank is likely to keep borrowing costs at 0.50% and may look to expand its asset purchase program over the coming months as policy makers aim to cement the economic recovery. [IMG]http://forums.babypips.com/export/story-images/2010/02/fundamental/daily_briefing/daily_pieces/trading_news_reports/02.16_TTN2.jpg[/IMG] [U]November 2009 U.K. Jobless Claims Change[/U]
Claims for unemployment benefits in the U.K. unexpectedly fell 6.3K in November to mark the first decline since February 2008, while the claimant count rate held steady at 5.0% for the third consecutive month amid expectations for a rise to 5.1%. The data encourage an improved outlook for future growth as policy makers see the nation emerging from the worst recession since the post-war period, and conditions are likely to improve going forward as the expansion in monetary and fiscal policy continues to feed through the real economy. At the same time, the ILO unemployment increased to 7.9% during the three-months through October, which was largely in-line with expectations, and the ongoing weakness in the labor market is likely to drag on the economy as policy makers anticipate the jobless rate to push higher over the following year. [IMG]http://forums.babypips.com/export/story-images/2010/02/fundamental/daily_briefing/daily_pieces/trading_news_reports/02.16_TTN3.jpg[/IMG] [B]What To Look For Before The Release[/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:
[U][B]Bullish Scenario:[/B][/U]
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. [U][B]Bearish Scenario:[/B][/U]
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. [IMG]http://forums.babypips.com/export/story-images/2010/02/fundamental/daily_briefing/daily_pieces/trading_news_reports/00001_GBP.jpg[/IMG] [IMG]http://forums.babypips.com/export/story-images/2010/02/fundamental/daily_briefing/daily_pieces/trading_news_reports/00002_GBP.jpg[/IMG] [B]How To Trade This Event Risk [/B]
Jobless claims in the U.K. are expected to fall 10.0K in January following the 15.2K contraction in the previous month, and the data is likely to spark increased volatility in the exchange rate as the Bank of England is scheduled to release its minutes from the February policy meeting at 9:30 GMT. Nevertheless, a report by the National Institute of Economic and Social Research showed economic activity expanded 0.4% during the three-months through January after increasing 0.1% in the fourth-quarter of 2009, but the group went onto say that “the economy remains very depressed” as households continue to face fading demands for employment paired with tightening credit conditions. At same time, a separate report showed the PMI for manufacturing jumped to 56.7 from a revised 54.6 in December to mark the fastest pace of growth since recordkeeping began in 1994, and businesses may raise their willingness to expand their labor force and increase the rate of production over the coming months as the economy emerges from the worst recession since the post-war period.
However, the Bank of England held a dovish tone in its quarter inflation reportrelease earlier this month and said that the recovery was “somewhat weaker” than previous expected, with the ongoing slack in the economy continuing to weigh on the outlook for future growth. As a result, the central bank anticipates to see a moderate recovery this year and forecasts GDP to expand at an annualized pace of 3.2% in the second-quarter of 2011. Moreover, BoE Governor Mervyn King reiterated that he continues to see a “substantial margin” of slack in his letter to Chancellor of the Exchequer Alistair Darling, and went onto say subdued wage growth may continue to drag on economic activity as private-sector spending remains one of the leading drivers of growth. As a result, if the central bank maintains a dovish outlook for future policy and continues to see a risk for a protracted recovery, we are likely to see the comments from the MPC trump a drop in unemployment as investors scale back expectations for a rate hike later this year.
Trading the given event risk may not be as clear cut as some of our previous trades as the BoE is scheduled to release its minutes from the February rate decision but nevertheless, price action following a drop in unemployment could certainly set the stage for a long Cable trade as the central bank is likely to reiterate its comments from the quarterly inflation report. Therefore, if we see jobless claims fall 10.0K or greater from the previous month, we will need to see a green, five-minute candle following the release to confirm a buy entry on two-lots of GBP/USD. Once these conditions are met, we will set the initial stop at the nearby swing low or a reasonable distance taking volatility into account, and this risk will establish our first target. The second objective will be based on discretion, and we will move the stop to cost once the first trade reaches its intended target in order to preserve our profits.
In contrast, fears of a protracted recovery paired with the ongoing weakness in the domestic economy may lead businesses to keep a lid on production and employment, and a dismal labor report is likely to drag on the exchange rate as investors weigh the outlook for future growth. As a result, if claims of jobless benefits holds flat or unexpectedly rises in January, we will favor a bearish outlook for Sterling, and will utilize the same setup for a short pound-dollar trade as the long position laid out above, just in reverse.
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[I]To discuss this report contact David Song, Currency Analyst: <[email protected]>[/I]