The British pound is likely to face increased selling pressures over the next 24 hours of trading as economists forecast jobless claims in the U.K. to increase 116.0K in March, and the labor market is likely to weaken further as the National Institute of Economic and Social Research expects the economic downturn to last throughout the third quarter of this year.
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[B][U]Trading the News: [/U][/B][B][U]U.K. Jobless Claims Change[/U][/B]
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What’s Expected[/U][/B] Time of release: [B]04/22/2009 08:30 GMT, 04:30 EST[/B]
Primary Pair Impact[B] : GBPUSD[/B]
Expected: 116.0K
Previous: 138.4K
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[B]Effects the change in Jobless Claims had over GBPUSD for the past 2 months[/B][/U]
[U]February 2009 U.K. Jobless Claims Change[/U]
The U.K. labor market lost another 138.4K jobs in February, which is the biggest drop in employment since 1971, and conditions are likely to get worse as the region faces its worst economic downturn in over half a century. As a result, total claims for jobless benefits reached 1.39M during the month, while the claimant count rate rose for the thirteenth month to 4.3% from a revised reading of 3.9% in January, and the outlook for private spending remains bleak as households face a deepening recession. As a result, Prime Minister Gordon Brown pledged GBP 20B in fiscal stimulus, while the Bank of England voted unanimously to purchase GBP 75B in government debt, and the unprecedented steps taken on by policymakers should help to mitigate the downside risks for growth and inflation however, as credit conditions remain far from normal, the economic outlook remains bleak.
[U]January 2009 U.K. Jobless Claims Change[/U]
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.
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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:
[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.
[B]How To Trade This Event Risk[/B]
The British pound is likely to face increased selling pressures over the next 24 hours of trading as economists forecast jobless claims in the U.K. to increase 116.0K in March, and the labor market is likely to weaken further as the National Institute of Economic and Social Research expects the economic downturn to last throughout the third quarter of this year. The final GDP reading for the fourth quarter showed that the economy contracted at an even faster pace from the preliminary release as private consumption, which is one of the biggest drivers of growth, dropped 1.0% from the third-quarter, and as the Bank of England anticipates1Q GDP to contract at levels much like what we’ve seen in the fourth quarter, firms may 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 6.5% during the three-months through February, which is the biggest decline since recordkeeping began in 1968, while service-based activity slipped 1.3% in the three-months through January to mark the largest drop on record, and conditions are likely to get worse as demands from home and abroad falter. Retail sales in the region unexpectedly fell 1.9% in February, while household spending grew at an annual rate of 0.4% from the previous year, which is the slowest pace of growth since September 1995, and the outlook for private consumption remains bleak as households face fading demands for employment paired with tightening credit conditions. Meanwhile, after putting a floor on the benchmark interest rate, BoE dove David Blanchflower argued that the central bank’s economic projections that were established in 2008 were ‘completely wrong’ as policymakers downplayed the risks for a recession, and went onto say that the ‘report was based on wishful thinking’ during an interview earlier this week. Mr. Blanchflower was the only board member of the MPC who foresaw ‘a severe recession was coming’ as he voted to cut rates as early as November 2007, and the comments from the central bank dove undermines the positive outlook held by the Chancellor of the Exchequer, Alistair Darling, as he expects the economy to expand in 2010. Deteriorating fundamentals paired with the downturn in global trade continues to foreshadow a deepening downturn in the region, and the weakening outlook for growth and inflation is likely to weigh on the exchange rate as growth prospects falter but nevertheless, as risk trends continue to dictate price action in the currency market, long-term expectations for higher interest rates could boost demands for the British pound as market sentiment improves.
Trading the given event risk clearly favors a bearish forecast for Cable as economists anticipate claims for unemployment to rise another 116.0K from February however, an enhanced labor report paired with a rise in market sentiment would certainly set the stage for long pound trade following the release. Therefore, if jobless claims rises less than 90.0K in March, we will look for a green, five-minute candle subsequent to the event to confirm a buy entry on two lots of GBP/USD, and once these conditions are met, we will set our initial stop at the nearby swing low (or reasonable distance taking volatility into account), and this risk will determine our first target. Our second target will be based on discretion, and in an effort to preserve our profits, we will move the stop on the second lot to breakeven once the first trade reaches its target.
Conversely, fears of a deepening recession paired with fading demands from home and abroad are likely to weigh on businesses, and as the downturn in the global economy intensifies, firms may continue to cut back on employment in order to stay afloat. As a result, an in-line print, or a rise of more than 116.0K in jobless claims would lead us to sell Cable, and we will follow the same setup for a short pound-dollar trade as the long position listed above, just in reverse.
