Changes in the number of applications for unemployment benefits in the UK. Impact of news publication on the GBP/USD currency pair

An increase in costs that are financed from the budget almost always negatively affects the national currency.

That is why this aspect is always taken into account when conducting fundamental market analysis on Forex.

The volume of financial flows that have to be paid for unemployment benefits for each state is one of the most costly, and the more developed the country, the more money is spent on supporting citizens. 

This is primarily due to the social standards that are accepted within the country.

However, the chain by no means ends with simple financing, since with an increase in the unemployed population, the income of taxes paid to the budget by the employer decreases, the population becomes impoverished, which in turn leads to a deterioration in a number of economic indicators.

 The change in the number of unemployment claims in the UK is an indicator that is released on a monthly basis, and its main purpose is to show the number of people unemployed in the UK.

For the UK, due to its high social standards, the increase in the number of unemployed people has a significant impact on the country's budget, since not only can unemployment benefits be paid for a long period of time, but in monetary terms it is a decent amount of money. Every year, the UK authorities struggle with the influx of emigrants whose main goal is to receive unemployment benefits, which are available when obtaining citizenship.

Interpreting news when trading the Forex market is very simple. If the number of people who applied for unemployment benefits increases, then this tells us about a worsening situation in the labor market, which actually leads to a weakening of the pound.

A decrease in the number of people who have filed for unemployment benefits is an excellent signal that the economic situation is improving, which leads to a strengthening of the pound. 

However, despite all the logic regarding the influence of the indicator, it is quite difficult to apply this knowledge in practice. This is due to the fact that you never know how the market will react to the publication of news, how far the price can go, and the most important thing is which stop order to work with, so that in case of strong volatility we are not simply thrown out of the market.

In order to answer these questions and draw a general outline about the possible profitability of trading on this news, let’s look at how the market reacted to the last four published data on the GBP/USD currency pair.

On 05/13/2015, after the release of -12.6K, you can see that the number of people who filed for unemployment benefits has increased significantly, since last month it was -16.7K. Therefore, based on this data, we come to the conclusion that the pound is weakening against the euro and we should observe a rapid fall in the chart of the GBP/USD . How the market reacted to the news can be seen below:

Five minutes before the news release, you can see a gap that could lead you along a confusing trail. But the market did not keep itself waiting and the price successfully passed 105 points in 3 hours and 55 minutes. The news ended with the formation of a new trend in the opposite direction.

On June 17, 2015, the number of applications for benefits decreased significantly compared to the previous month, so many expected a strong increase in the chart of the GBP/USD currency pair, since the improvement in the labor market should greatly influence the strengthening of the GBP. The reaction of market participants to the publication of data can be seen in the image below:

 The market, as expected, reacted quite adequately to the publication of positive data and successfully covered the distance of 91 points. The effect of the news lasted at least 2 hours and 30 minutes.

But when considering this example, it turned out that literally 15 minutes before the publication of the news, negative news on the US economy came out, so the release of data on the number of applications for unemployment benefits simply strengthened the market reaction to the previous news.

On July 15, 2015, almost all analysts trumpeted with one voice that the number of unemployed would decrease and fewer benefits would have to be paid, but instead of the expected decrease to -8.8K, they received an increase to 7.0K. Therefore, the market, in theory, should react strongly to such a strong difference in expectations, and the chart of the GBP/USD currency pair should rapidly go down. The reaction of market participants can be seen in the picture below:

 After publication, you can observe a strong price gap and a rapid drop in the chart by 77 points within four hours. The end of the news symbolized a new emerging trend.

On 08/12/2015, a critical majority of economists predicted an increase in the number of unemployed people and people who would apply for benefits by the 1.5K mark. But after the publication, it became obvious that there was a reduction in the unemployed population and the number of applications for benefits, the value of which was -4.9K. By all laws of logic, the chart of the GBP/USD currency pair should grow rapidly.

 The example shows that the price after a false gap five minutes before the news came out worked perfectly and passed 104 points within seven hours.

If we analyze all four examples, we can state that the market almost always reacts violently to the release of an indicator. After the publication of data, the market, as a rule, forms a new micro trend that lasts at least two and a half hours.   

Speaking in hard numbers, if we had set the minimum profit and stop loss , which we recorded during our research, then with a target of 77 points and the same stop we would have earned: 77+77+77+77=308 points of profit in four positions.