EUR/USD: Trading the Advanced U.S. 3Q GDP Report

Trading the News: U.S. Gross Domestic Product (Annualized)

What’s Expected
Time of release:        10/29/2009 12:30 GMT, 08:30 EST
Primary Pair Impact :    EURUSD
Expected:         3.2%
Previous:         -0.7%

Impact the U.S. GDP has had on EURUSD over the last 2 quarters

2Q 2009 U.S. Gross Domestic Product

The advanced GDP reading showed the U.S. economy contracted at an annual pace of 1.0% in the third-quarter amid expectations for a 1.5% drop in the growth rate, led by a 1.2% drop in personal consumption, while government spending increased 5.6% from the first three-months of the year to mark the biggest rise since 2003. A deeper look at the report showed private investments tumbled at an annual pace of 20.4% after falling 50.5% in the first quarter, while exports slumped 7.0% followed by a 15.1% drop in imports. Nevertheless, as the government takes unprecedented steps to stimulate the ailing economy, policy makers anticipate the nation to emerge from the recession later this year, and the Federal Reserve is likely to hold the benchmark interest rate at the record low throughout the second-half of the year in an effort to foster a sustainable recovery.

1Q 2009 U.S. Gross Domestic Product

Economic activity in the U.S. fell at an annualized rate of 6.1% in the first quarter, led by a record drop in inventories, and conditions are likely to get worse as the nation faces its worst economic downturn in over half a century. The breakdown of the report showed business spending plunged 38% from the previous year, with firms cutting stockpiles of unsold goods at the fastest pace since recordkeeping began in 1947, and fears of a protracted recession may lead companies to scale back on production and employment throughout the year as the outlook for future growth remains bleak. Nevertheless, as the Obama Administration pledges $787B in public spending to jump-start the ailing economy, the expansion in monetary and fiscal policy should help to stem the downside risks for growth and inflation as policymakers anticipant the economy to emerge from the recession in the second half of the year.

What To Look For Before The Release

Traders with access to market depth information via the FXCM Active Trader Platform may use it to gauge the potency of the economic data release as well as to shed some light on the market’s directional bias. Increasing volume ahead of the announcement will telegraph likely follow-through behind whatever move is to materialize, while an imbalance in available liquidity on the Bid versus the Offer side of the market will tell us the direction major institutions are likely favoring ahead of the announcement:

Bullish Scenario: If we see substantially deeper available liquidity on the Bid side of the market, this tells us that major price providers in the market are looking to buy the Euro against the US Dollar. Considering that close to 60% of all FX market volume is cleared through just six top banks, we see it prudent to be on the same side of the trade as major institutions and will favor a bullish bias on EURUSD ahead of the data release.

Bearish Scenario: If we see substantially deeper available liquidity on the Offer side of the market, this tells us that major price providers in the market are looking to sell the Euro against the US Dollar. Considering that close to 60% of all FX market volume is cleared through just six top banks, we see it prudent to be on the same side of the trade as major institutions and will favor a bearish bias on EURUSD ahead of the data release.

How To Trade This Event Risk

The U.S. dollar is likely to face increased volatility over the next 24 hours of trading as economists forecast the growth rate to expand at an annual pace of 3.2% in the third-quarter, with personal consumption anticipated to rise 3.1%, and the rebound in consumer demands is likely to encourage an improved outlook for future growth as private-sector spending accounts for more than two-thirds of the economy. However, a report by the Commerce Department showed retail sales slipped 1.5% in September, with new home sales unexpectedly falling 3.6% during the same period, and households may continue to lower their temperament to spending as they face a weakening labor market paired with tightening credit conditions. Moreover, a separate report by the Federal Reserve showed consumer credit weakened 5.8% in August to mark the seventh consecutive decline, with the Beige Book reinforcing a dour outlook for private spending as employment remained “weak or mixed” in most regions, and businesses may continue to scale back on production and employment over the coming months as policy makers see a risk for a protracted recovery. Meanwhile, U.S. durable goods orders advanced 1.0% in September to mark the fourth rise in the last six month, with construction spending jumping 0.8% in August amid expectations for a 0.1% decline, and the rebound in business spending should help to shore up the ailing economy following the marked drop in inventories during the first-half of the year. At the same time, personal incomes increased for the second consecutive month in August, while pending home sales jumped 6.4% during the same period after rising 3.2% in July, and conditions may continue to improve going into the following year as the government stimulus works its way through the real economy. Nevertheless, as policy makers see the nation emerging from the worst economic downturn since the post-war period, the advanced GDP reading is likely to strengthen the greenback as the economic outlook improves however, as risk trends continue to dictate price action in the foreign exchange market, a rise in risk appetite could weigh on the reserve currency as market participants move into higher-yielding investments.

Trading the given event risk favors a bullish outlook for the greenback as economists anticipate the world’s largest economy to emerge from the worst recession since the Great Depression, and price action following the release could set the stage for a long dollar trade as the economic outlook improves. Therefore, if GDP expands 3.2% or greater in the third quarter, with personal consumption rising at least 3.1%, we will look for a red, five-minute candle subsequent to the release to confirm a sell entry on two-lots of EUR/USD. Once these conditions are met, we will set our initial stop at the nearby swing high, or a reasonable distance taking volatility into account, and this risk will establish our first objective. Our second target will be based on discretion, and we will move the stop on the second lot to breakeven once the first trade reaches its target in an effort to preserve our profits.

In contrast, the downturn in employment paired with the slump in bank lending may hamper the prospects for a sustainable recovery, and a dismal GDP reading is likely to drag on the exchange rate as investors weigh the outlook for future policy. As a result, if the growth rate expands 1.5% or less, we will favor a bearish outlook for greenback, and will follow the same strategy for a long euro-dollar trade as the short position mentioned above, just in reverse.