Trading the News: Euro-Zone Economic Confidence
What’s Expected
Time of release: 11/27/2009 10:00 GMT, 05:00 EST
Primary Pair Impact : EURUSD
Expected: 88.0
Previous: 86.2
Impact the Euro-Zone Economic Confidence has had on EURUSD over the last 2 months
October 2009 Euro-Zone Economic Confidence
| The gauge of economic sentiment in Europe jumped to 86.2 in October from 82.8 in the previous month to mark the highest reading since September 2008, and conditions are likely to improve going into 2010 as the expansion in monetary and fiscal policy continues to support the real economy. The European Commission expects the euro-region to emerge from the recession and forecasts economic activity to expand 0.2% in the third quarter after contracting 0.2% during the three-months through June, and the improvement in the fundamental outlook may drive the exchange rate higher throughout the second-half of the year as the economy returns to growth. However, European Central Bank President Jean-Claude Trichet held a cautious outlook and expects to see a “rather uneven” recovery as households continue to face a weakening labor market paired with tightening credit conditions. |  |
September 2009 Euro-Zone Economic Confidence
| Economic confidence in the Euro-Zone rose to a 12-month high in September, with the index rising to 82.8 from a revised reading of 80.8 in the previous month, and the data encourages an improved outlook for the region as policy makers see the economy emerging from the worst recession since the post-war period. Nevertheless, European Central Bank President Jean-Claude Trichet expects to see a “gradual recovery” within the region as households continue to face a weakening labor market paired tightening credit conditions, and maintained a dovish outlook for inflation as the central bank forecasts prices to grow at an annualized pace of 0.4% this year and 1.0% in 2010. As the Governing Council expects price pressures to remain subdued over the follow year, the ECB may hold the benchmark interest rate at the record low throughout the first-half of 2010 as price pressures hold below the 2% target. |  |
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. |
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How To Trade This Event Risk
Economic confidence in the Euro-Zone is widely expected to reach a 14-month high in November as economists forecast the European Commission’s index to rise to 88.0 from 86.2 in October, and the data is likely to reinforce an enhanced outlook for future growth as the economy emerges from the worst recession since the post-war period. The advanced GDP reading showed economic activity expanded 0.4% in the third-quarter after contracting 0.2% during the three-months through June, and conditions are likely to improve going forward as the expansion in monetary and fiscal stimulus continues to support the real economy. However, a survey by the ZEW Center for European Economic Research showed investor sentiment in the euro-region unexpectedly weakened for the second consecutive month in November, with the index plunging to 51.8 from 56.9 in the previous month as participants scaled back expectations for a marked recovery, and the slump in global trade paired with the downturn in the labor market may continue to weigh on outlook for growth and inflation as policy makers anticipate the jobless rate to increase throughout the following year. A report by the European Union’s statistics the annual rate of unemployment increased to 9.7% in September from 9.6% to mark the highest reading since January 1999, and businesses may continue to keep a lid on production and employment going into the following year as policy markers see a risk for a protracted recovery. European Central Bank President Jean-Claude Trichet said that it is “too early” to say for sure that the economic crisis has ended, and pledged to withdraw the emergency measures at a “timely, gradual” pace as the recovery remains fragile. In addition, Bundesbank President Axel Weber said that “the general economic trend is pointing upward,” but remained “concerned that unemployment may rise in the course of next year,” which would hamper the outlook for private spending, and the Governing Council may continue to hold the benchmark interest rate at the record-low throughout the first-half of the following year in order to encourage a sustainable recovery. At the same time, the International Monetary Fund expects to see a “slow and fragile” recovery within the region as the global financial system remains weak, while the Organization for Economic Cooperation and Development said central banks should “move slowly” in normalizing monetary policy, and the ECB may hold a neutral policy stance going forward as the board maintains a dovish outlook for inflation.
Trading the given event risk favors a bullish outlook for the single-currency as market participants anticipate economic confidence to improve the eighth consecutive month in November, and price action following the release could set the stage for a long euro trade as growth prospects improve. Therefore, if the index rises to 88.0 or higher from the previous month, we will look for a green, five-minute candle following the release to generate a buy entry on two-lots of EUR/USD. Once these conditions are met, we will set the initial stop at the nearby swing low or a reasonable distance, and this risk will establish our first target. 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.
On the other hand, the downturn in employment paired with slump in global trade could drag on the outlook for future growth, and a unexpected drop in economic confidence could weigh on the exchange rate as policy makers see a risk for a protracted recovery. As a result, if the survey unexpectedly slips to 84.0 or lower in November, we will favor a bearish outlook for the single-currency, and will follow the same setup for a short euro-dollar trade as the long position laid out above, just in reverse.
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To discuss this report contact David Song, Currency Analyst: dsong@fxcm.com
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