EUR/USD: Trading the Sentix Investor Confidence Survey

Trading the News: Euro-Zone Sentix Investor Confidence Survey

What’s Expected
Time of release:        02/08/2010 09:30 GMT, 04:30 EST
Primary Pair Impact :    EURUSD
Expected:         -2.7
Previous:         -3.7

Impact the Sentix confidence survey had on EURUSD through the last 2 months

January 2010 Euro-Zone Sentix Investor Confidence

The Sentix investors confidence survey increased for the sixth month in January, with the index rising to -3.7 from -5.5 in the previous month to mark the highest reading since June 2008, and conditions are likely to improve going forward as the expansion in monetary and fiscal policy continues to feed through the real economy. The breakdown of the report showed the gauge for future expectations increased to 11.25 from 9.50 in December, and investors may continue to ramp up their outlook for future growth as policy makers pledge to foster a sustainable recovery. At the same time, the Governing Council is widely anticipated to normalize policy this year as the region emerges from the recession, but subdued price growth may lead the ECB to hold a neutral policy stance as it aims to balance the risks for the economy.

December 2009 Euro-Zone Sentix Investor Confidence

Investor confidence in the Euro-Zone improved for the fifth consecutive month in December, with the Sextix survey advancing to an 18-month high of -5.5 from -7.0 in the previous month, and the data encourages an improved outlook for the region as the economy emerges from its worst recession since the post-war period. However, a deeper look at the report showed the gauge for future expectations slipped to 9.5 from 12.0 in November as policy makers see a risk for a protracted recovery, and the European Central Bank may continue to hold a dovish outlook for future policy as they aim to balance the risks for growth and inflation. Nevertheless, as the central bank pledges to normalize policy in the following year, investors speculate the ECB to hike rates in 2010 as economic and financial conditions improve.

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

Investor confidence is expected to improve for the eight consecutive month in February, with economists forecasting the Sentix index to increase to -2.7 from -3.7 in the previous month, and the data could stoke increased volatility in the exchange rate as market participants weigh the prospects for a sustainable recovery in the region. A report by the European Commission showed economic confidence in the region improved for the tenth month in January, with the index increasing to 95.7 from a revised 94.1 in the previous, while the gauge for business sentiment advanced to -1.12 from -1.30 in December to mark the highest reading since October 2008. However, a separate report by the ZEW Center for European Economic Research showed investor sentiment unexpectedly weakened in January, with the gauge slipping to 46.4 from 48.0 in the month prior, and fears of a protracted recovery may weigh on the outlook for future growth as the central bank aims to normalize policy this year.

The European Central Bank held borrowing costs at the record-low of 1.00% earlier this week, and stated that the interest rate remains appropriate as the risks for the economy remain broadly balance. At the same time, President Jean-Claude Trichet continued to expect a “moderate” recovery this year as households face a deteriorating labor market paired with tightening credit conditions, and expects the jobless rate to rise “somewhat” further as business keep a lid on production and employment. Moreover, the central bank head reiterated that not all of the emergency measures will be needed as economic and financial conditions improve, and noted that the Governing Council will decide on the pace of normalizing policy at its next meeting in March. However, as the ECB expects price pressures to remain subdued throughout the year, we may see the central bank maintain its currency policy next month as they aim to encourage a sustainable recovery.

Trading the given event risk favors a bullish outlook for the single-currency as market participants expect investor confidence to improve in February, and price action following the release could set the stage for a long euro trade. Therefore, if the Sentix index increases to -2.7 or higher, we will need to see a green, five-minute candle following the data to confirm a buy entry on two-lots of EUR/USD. Once these conditions are fulfilled, we will place our initial stop at the nearby swing low 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.

In contrast, the ongoing slump in the labor market paired with fears of a protracted recovery may lead investors to scale back the outlook for the economy, and a dismal confidence report is likely to drag on the exchange rate as policy makers expect the economy to face headwinds this year. As a result, if the index slips to -4.2 or lower, we will favor a bearish outlook for the single-currency, and will implement the same setup for a short euro-dollar trade as the long position mentioned above, just in reverse.

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