width=215Release: UK Claimant Count (Dec) Consensus Forecast: 7.0K Previous: 3.0K
Release: Unemployment Rate 3m/3m (Nov) Consensus Forecast: 8.3% Previous:8.3% 

Date/Time: 1/18/12 4:30AM ET (9:30 GMT)

UK Labor Market Continues to Deteriorate:

In our preview of the UK consumer price index we highlighted some of the concerns around the UK economy. One of those key concerns is that domestic demand continues to be pressured by high inflation - though that is receding - and a week labor market which is not supporting wage growth.

In the Wednesday European session we get our latest figures on the UK labor market. The claimant count change - the number of Britons claiming unemployment benefits after losing their jobs - is expected to rise by 7.0K in December, following a 3.0K climb in November.

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That would tell us that the labor market situation in the UK continues to show deterioration, though looking at the chart of the claimant count we see that the situation was worse during the middle of 2011, and the claimant count has declined somewhat in the second half of the year.

Still, a weaker labor market means that consumer spending should remain pressured. Retail sales fell 0.4% in November and later in the week we get the reading for December - expected to show a 0.6% gain.

Here's a nice graph of wages, inflation (RPI) and household consumption:

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While the claimant count change is important, much focus has been turned to the overall number of unemployed, which is running at 2.64 million, the highest since September 1994.

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The labor market may not improve for some time.

From DailyMail: Unemployment will not fall below 2.5 million until 2016 at the earliest and will peak at 2.9million next year, an expert predicted today. Public sector cutbacks mean the number of people out of work will continue to soar over the next 18 months. There will be 2.85million jobless workers by the end of the year before the figure rises by another 50,000 at the start of 2013.

From Politics.co.uk: The Office for Budget Responsibility had estimated that spending cuts would lead to the loss of 400,000 jobs, but revised that guess upwards to 710,000 in the autumn statement.

Here's the UK Unemployment Rate:

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GBP/USD - Market Ready to Fade Pound Rally

In any case, as we discussed in our earlier preview the GBP/USD is at the precipice from a longer term perspective as its economic outlook remains bleak and the currency is likely to come under pressure as a result of expectations for more QE from the Bank of England.  Tuesday's CPI data only confirmed that inflation is cooling, giving the bank more leeway to undertake further easing.

This time we look at the shorter term GBP/USD chart.

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As we can see, the GBP/USD rallied on Monday and into Tuesday, but failed to reach the high set on Friday near 1.5410, and was rejected at the 200-ema (thick gray line). There is a short term upward sloping level of support, and if broken that opens up the possibility of a further retrace of the recent swing higher.

A weaker than expected employment report can put pressure on the GBP and cause the GBP/USD to retest its lows from Monday (1.5285) and then the lows from Friday (1.5234). A close near those levels would break longer term supports and present a case for further downside risk for the cable.

A better than expected release could have the opposite effect in that it could bolster the GBP, especially if it comes in the context of some risk-on sentiment, and a break of the 200-ema and 1.54 would mean we either have sideways action or a further GBP rally. However, with the fundamental factors arrayed against the GBP, this would present an opportunity to short the pair once a higher level of resistance was met.

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Nick Nasad is the Chief Market Analyst at FXTimes - provider of Forex News, Analysis, Education, Videos, Charts, and other trading resources.