GBP/USD Could Break Above 2.0400 On Strong UK Labor Market Data

Jobless Claims Change (AUG) (4:30 EST; 8:30 GMT)
Expected: -8.0K
Previous: -8.5K

Avg Earnings Ex Bonus (3M/YoY) (JUL) (4:30 EST; 8:30 GMT)
Expected: 3.5%
Previous: 3.4%

How Will The Market React?

UK economic data on Wednesday is expected to show that labor market conditions tightened, as the jobless claims change is estimated to have fallen by 8,000. The decline in claims for unemployment benefits should help keep the jobless rate at 2.6 percent - the lowest since April 2005 - as resilient economic expansion has led to a competitive job environment. Thus far, a record influx of migrants has curbed wages and swelled the workforce as the employment level reached 29.07 million in the second quarter, the second-highest reading on record. Furthermore, in an attempt to help contain inflation pressures, UK Prime Minister Gordon Brown insisted recently that he would not undermine the economy by making 'unaffordable' promises on public sector wage deals, saying that financial 'discipline' was essential to maintain growth. Nevertheless, average earnings growth (excluding bonuses) is predicted to have picked up to 3.5 percent in the three months through July, which could be of concern to inflation-weary Bank of England. On the other hand, the BOE said on September 6th that it is 'too soon to tell how far the disruption in financial markets will impair the availability of credit to companies and households,' signaling that the status of the broader markets is now the bank's primary concerns. Regardless, a stronger-than-expected drop in jobless claims or a sharp rise in average earnings could leave traders considering a rate hike within the next few months.

Bonds - UK Long Gilt Futures

Gilts have continued to extend their rally amidst flight-to-safety, and trade looks pretty comfortable above 107.76 despite some initial easing from the 108.14 level. Daily charts remain positive as buyers build on last Wednesday's outside day up, and this will likely persist as long as 107.58 holds with the 108.30 long term Fib becoming a realistic target over the next few days. However, if UK data proves to be surprisingly encouraging on Wednesday, Gilts could fall back for a test of support

FX-GBPUSD

The GBPUSD rally has been sharp and rapid, however, the pair's gains have slowed as price approaches the psychologically important 2.0400 level. However, with Cable stabilizing above the 61.8 percent fib of 2.0651 - 1.9649 at 2.0266, it appears that the 8/9 and 8/6 highs at 2.0400/60 are not out of reach. Economic data out of the UK could accelerate such a move, as jobless claims are anticipated to fall, highlighting the tightness of the UK labor market. Furthermore, if average earnings rise in line with or more than expectations, traders may ramp up speculation that the Bank of England will start using more hawkish rhetoric once jittery financial markets calm down again. On the other hand, disappointing economic releases and a break below trendline support at 2.0230 could see Cable make a bearish press down towards 2.0000.

Equities - FTSE 100 Index

The FTSE 100 regained its footing on Tuesday as the index bounced from support at former trendline resistance. While risk aversion trends will likely remain the primary driver of price action in the equity markets, Wednesday's UK economic data could contribute to any pre-existing gains in the FTSE. However, the index is nearing resistance at the 200 SMA at 6,358, and a break above 6,400 would prove to be unabashedly bullish for UK equities. On the other hand, if data proves to be disappointing or if equity traders become spooked by credit jitters once again, the FTSE 100 could take aim on the 6,200 level, with sharp losses targeting support at 6,081.