Jobless claims in the U.K. rose at its fastest pace since 1991 as applications surged 75.7K in November to reach an eight-year high of 1.07M. The downturn in the labor market pushed the unemployment rate to a seven-year high of 3.3% from a revised reading of 3.1% in October, and conditions are likely to get worse as Europe's second largest economy faces its worst recession in over a decade. Despite the extraordinary efforts taken on by the Bank of England and the U.K. Treasury, growth prospects are likely to deteriorate further as financial uncertainties linger, and may lead the central bank to step up their efforts over the near-term as policy makers expect the annual rate of growth to contract 1.3% next year. As a result, market participants expect the BoE to continue their easing cycle over the coming months, which is likely to weigh on the British pound going forward.
October 2008 U.K. Jobless Claims Change
The U.K. economy gave back the most jobs since 2001 which led to the unemployment rate rising at its fastest pace in 16 years. Although the data was better than expected, it pointed to further weakness in the economy. The BoE would confirm that notion in its quarterly inflation report where they considerably lowered their forecasts for growth and predicted that inflation would fall below their 2% target. The central bank also signaled that they are prepared to cut interest rates to whatever level is necessary as the country finds itself in a recession that is expected to extend until the middle of 2009. The near miss of expectations would leave us on the sidelines following this release, but the dour inflation report and the weakening labor market would lead to a short position.
September 2008 U.K. Jobless Claims Change
Unemployment claims in the U.K. increased 31.8K to 939,900 in September to reach its highest level since 2006. Fading growth prospects paired with slowing demands from the global economy has certainly pushed firms to cutback on employment, and conditions may only get worse as the U.K. heads into a recession. Fears of a global meltdown led the Bank of England to join the Fed and ECB in a coordinated rate cut on October 8th, and unexpectedly lowered the interest rate by 50bp to 4.50%. In addition, Prime Minister Gordon Brown has joined forces with the Treasury to provide a bailout package for financial institutions in U.K., and has called for additional support by foreign governments, including the IMF. Despite the extraordinary efforts by policy makers, the U.K. is expected to fall into a technical recession by the end of the year, and may lead the BoE to lower borrowing costs further in order to avoid a deep and prolonged recession
How To Trade This Event Risk
The U.K. labor market is expected to weaken further as economists forecast jobless claims to rise 81.0K in December, which could spur increased selling pressures for the British pound as the unemployment rate is expected to increase to 3.5% from 3.3% in November. Financial uncertainties paired with the downturn in the global economy have dragged on businesses throughout the second half of 2008, and conditions are likely to get worse as credit conditions remain far from normal. Business investments plunged 1.3% in the third quarter as economic activity slipped 0.6% from the previous quarter, and business spending is likely to deteriorate further as the National Institute for Economic and Social Research expect GDP to contract 1.5% in the fourth quarter. Meanwhile, the severe economic downturn paired with falling commodity prices have also raised the risks for deflation, which could weigh on the interest rate outlook for the U.K. as policymakers carryout their dual mandate to ensure price stability while fostering economic growth. BoE Governor Mervyn King and Co. cut the benchmark interest to its lowest level since the central bank was established in 1694 as policy makers expect the economy to contract 1.3% in 2009, and is widely expected to lower borrowing costs further as the economy faces its worst recession in over a decade. Despite the extraordinary efforts taken on by the Bank of England and the U.K. Treasury last year, the MPC may adopt a zero-interest rate policy (ZIRP) over the near-term as growth prospects deteriorate at a record pace, which could stoke a bearish outlook for the British pound going forward. Nevertheless, the BoE Minutes, which will cross the wires at the same time, may overshadow the labor report as investors expect the central bank to ease policy further this year.
The British pound slipped to an eight-year low against the U.S. dollar this week, and expectations for a dismal labor report is likely to weigh on the pair. Therefore, we would need to see an enhanced labor report (jobless claims of less than 75K) paired with a clear shift in the BoE's policy to set the stage for a long GBPUSD trade. With our expectations at hand, we will look for a green, five-minute candle following the release to confirm entry on two lots of the pound-dollar. Our initial stop will be placed at the nearby swing low (or reasonable distance), and this risk will determine our first target. Our second target will be based on discretion, and in order to preserve our profits, we will move the stop on the second lot to breakeven once the first lot reaches its target.
On the other hand, mounting turmoil in the global financial market paired with fading demands for employment is likely to weigh on the economy, and the dour outlook for the U.K. favors a bearish outlook for the British pound. As a result, a job loss of 85.0K or higher would lead us to short the GBPUSD, and we will follow the same strategy for the short positions as the long trade mentioned above, just in reverse.
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