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

U.K. jobless claims are expected to hold flat in April after unexpectedly rising 0.7K in the previous month, and a mild improvement in the labor market could spark a bullish reaction in the British Pound as the central bank adopts a hawkish outlook for monetary policy.

Trading the News: U.K. Jobless Claims Change

What's Expected:

Time of release: 05/18/2011 8:30 GMT, 4:30 EST

Primary Pair Impact:GBPUSD

Expected: 0.0K

Previous: 0.7K

DailyFX Forecast: -1.0K to 2.0K

Why Is This Event Important:

U.K. jobless claims are expected to hold flat in April after unexpectedly rising 0.7K in the previous month, and a mild improvement in the labor market could spark a bullish reaction in the British Pound as the central bank adopts a hawkish outlook for monetary policy. However, as the Bank of England meeting minutes are scheduled to cross the wires at the same time, currency traders may show a greater reaction the policy statement should we see a shift within the MPC, and there is certainly a risk of seeing a 5-4 vote count in May as Governor Mervyn King looks to toughen his stance against inflation. In turn, the GBP/USD could face whipsaw-like price action following the slew of data, but a rise in interest rate expectations should foster a rally in the British Pound as market participants speculate the BoE to start normalizing monetary policy in the second-half of the year.

Recent Economic Developments

The Upside

Release	Expected	Actual
CBI Reported Sales (APR)	15	21
Gross Domestic Product (QoQ) (1Q A)	0.5%	0.5%
Retail Sales ex Auto Fuel (MoM) (MAR)	-0.4%	0.2%

The Downside

Release	Expected	Actual
Purchasing Manager Index Services (APR)	56.0	54.3
Purchasing Manager Index Construction (APR)	55.9	53.3
Purchasing Manager Index Manufacturing (APR)	57.0	54.6

The rebound in economic activity paired with the expansion in private sector consumption may encourage businesses to expand their labor force, and employment conditions may improve over the coming months as the region skirts a double-dip recession. However, firms may scale back on hiring as they lower their rate of production, and businesses may keep lid on employment given the ongoing weakness within the real economy. As the Bank of England curbs its outlook for future growth, the central bank may see scope to support the real economy for most of 2011, and Governor King may retain the expansion in monetary policy throughout the third quarter as the fundamental outlook remains clouded with high uncertainty.

Potential Price Targets For The Release

How To Trade This Event Risk

Trading the given event is certainly not as clear cut as some of our previous trades, but an enhanced labor report could set the stage for a long British Pound trade as growth prospects improve. Therefore, if claims for unemployment benefits slip 1.0K or greater in April, we will need to a see a green, five-minute candle following the release to establish a buy entry on two-lots of GBP/USD. Once theses preconditions are fulfilled, we will set the initial stop at the nearby swing low or a reasonable distance from the entry, and this risk will generate our first objective. The second target will be based on discretion, and we will move the stop on the second lot to cost once the first trade reaches its mark in an effort to protect our winnings.

In contrast, businesses may refrain from expanding their labor force give the ongoing weakness in the real economy, and firms may scale back on hiring as the central bank curbs its outlook for future growth. As a result, if unemployment claims increase 1.0K or more from the previous month, we will follow the same strategy for a short pound-dollar trade as the long position laid out above, just in the opposite direction.

Impact that the change in U.K. Jobless Claims has had on GBP during the last month

Period	Data Released	Estimate	Actual	Pips Change (1 Hour post event )	Pips Change (End of Day post event)
Mar 2011	04/13/2011 8:30 GMT	-3.0K	0.7K	-31	-27

March 2011 Jobless Claims Change

Claims for unemployment benefits in the U.K. increased 0.7K after contracting a revised 8.5K in February, while the claimant count rate held steady at 4.5% for the fifth consecutive month in April. At the same time, the unemployment rate using the Labour Organization's methodology unexpectedly fell back to 7.8% from 8.0% in January, but the ongoing weakness in the private sector could lead the Bank of England to support the real economy throughout the first-half of the year as it aims to encourage a sustainable recovery. However, as price pressures in Britain intensify, there could be a growing shift within the MPC, and the central bank may adopt a hawkish tone in the second-half of the year as it maintains its dual mandate to ensure price stability while fostering full-employment. The British Pound pared the overnight rally following the dismal labor report, with the GBP/USD slipping a fresh daily low of 1.6236, but the sterling recoup some of its losses during the North American trade as the exchange rate closed at 1.6266 at the end of the day.

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To discuss this report contact David Song, Currency Analyst: dsong@dailyfx.com