EUR/USD: Trading the U.S. Consumer Confidence Report

Trading the News: US Consumer Confidence

What’s Expected
Time of release:        12/29/2009 15:00 GMT, 10:00 EST
Primary Pair Impact :    EURUSD
Expected:         53.0
Previous:         49.5

Effects of US Consumer Confidence has had on EURUSD for the past 2 months

November 2009 US Consumer Confidence

U.S. consumer sentiment unexpectedly improved in November, with index rising to 49.5 from a revised 48.7 in the previous month, and households may continue to raise their outlook for future growth as the economy emerges from the worst recession since the Great Depression. The breakdown of the report showed the gauge for future expectations increased to 68.5 from 67.0 in October, while the labor differential index slipped to -46.6 from -45.9, and households may lower their temperament to spending going forward as the annual rate of unemployment holds at a 26-year high of 10.2%. At the same time, Fed Chairman Ben Bernanke held a cautious outlook for the economy as the labor market remains an “area of great concern,” and the central bank is likely to maintain its current policy going into the following year in order to encourage a sustainable recovery.

October 2009 US Consumer Confidence

Household confidence in the U.S. weakened for the second month in October, with the index tumbling to 47.7 from a revised reading of 53.4 in the previous month amid expectations for a rise to 53.5, and consumers may continue to ramp up their temperament to save over the coming months as they face a weakening labor market paired with tightening credit conditions. A deeper look at the report showed the gauge for future expectations weakened to 65.7 from 73.7 in September, while the labor index slipped to -46.2 from -43.4 in the previous month, and the data reinforces a weakened outlook for the nation as policy makers see a risk for a protracted recovery. As a result, the Federal Reserve pledged to maintain the benchmark interest rate at the record-low to encourage a sustainable recovery, and policy makers are likely to hold a dovish policy stance going forward as growth prospects remain far from favorable.

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

Consumer confidence in the U.S. is expected to improve for the second month in December as economists forecast the Confidence Board’s index to increase to 53.0 from 49.5 in the previous month, and the data could spark volatility in the exchange rate as investors weigh the prospects for a sustainable recovery in the world’s largest economy. However, the drop in market liquidity is likely to produce difficult trading conditions, and we may see choppy price action subsequent to the release as investors remain off-line ahead of New Years Day. Nevertheless, the final 3Q GDP reading showed economic activity expanded less than expected, with the growth rate increasing 2.2% amid an initial forecasts for a 2.8% rise as businesses kept a lid on spending, while personal spending advanced 0.5% in November after increasing a revised 0.6% in the previous month. At the same time, retail sales surged 1.3% after rising a revised 1.1% in October, while the annual rate of unemployment slipped to 10.0% from a 26-year high of 10.2%, and conditions are likely to improve going forward as the expansion in monetary and fiscal policy continues to feed through the real economy. Moreover, the Fed’s Beige Book noted economic conditions have “improved modestly” in most of the 12 districts, and said that consumer spending “picked up modestly” across the 12 districts even as credit standards remained tight, but the central bank held a cautious outlook for the economy as policy makers anticipate the labor market to weaken further over the following year . At the same time, Fed Chairman Bernanke said the nation faces “formidable headwinds” as the households continue to cope with fading demands for employment paired with tightening credit conditions during a speech to the Economic Club of Washington, and held a dovish outlook for future policy as the central bank expects to see a “moderate” recovery in 2010. Furthermore, Chairman Bernanke said that the economy still has “some way to go before we can be assured that the recovery will be self-sustaining,” with former Fed Chairman Paul Volcker stating that “the recovery is still vulnerable and dependent on fiscal stimulus measures.” As a result, the FOMC held the benchmark interest rate at the record-low of 0.25% in December and reiterated that borrowing costs will stay “exceptionally low” for an “extended period” of time as policy makers aim to encourage a sustainable recovery. In addition, the Fed said that “household spending appears to be expanding at a moderate rate, though it remains constrained by a weak labor market, modest income growth, lower housing wealth, and tight credit,” and went onto say that the “deterioration in the labor market is abating” as the economy emerges from the worst recession since the Great Depression.

Trading the given event risk favors a bullish outlook for the greenback as market participants anticipate consumer confidence in the U.S. to improve for the second consecutive month in December, and the data is likely to encourage an enhanced outlook for future growth as private spending accounts for more than two-thirds of the economy. Therefore, if the index rises to 53.0 or higher, we will need to see a red, five-minute candle following the data to generate a sell entry on two-lots of EUR/USD. One these conditions are fulfilled, we will place the initial stop at the nearby swing high or a reasonable distance, and this risk will establish our first target. Our second objective 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 order to preserve our profits.

On the other hand, tightening credit conditions paired with fading demands for employment may weigh on household sentiment, and price action following an unexpected drop in consumer confidence could weigh on the exchange rate as policy makers continue to see a risk for a protracted recovery. As a result, if the index slips to 47.0 or lower, we will favor a bearish outlook for the greenback, and will implement the same strategy for a long euro-dollar trade as the short position laid out above, just in reverse.

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To discuss this report contact David Song, Currency Analyst: dsong@fxcm.com