EUR/USD: Trading the Change in German Unemployment

Trading the News: German Unemployment Change

What’s Expected
Time of release:        02/25/2010  08:55 GMT, 03:55 EST
Primary Pair Impact :    EURUSD
Expected:         16K
Previous:         6K

Impact the German Unemployment Change has had on EURUSD over the last 2 months

January 2010 German Unemployment Change

Unemployment in Germany increased 6K in January amid forecasts for a 15K rise, which pushed the jobless rate to 8.2% from 8.1% in the previous month. Going forward, the deterioration in the labor market paired with tightening credit conditions are likely to dampen private sector spending, and the European Central Bank may keep borrowing costs at the record-low  of 1.00% throughout the first-half of 2010 as policy makers aim to balance the risks for growth and inflation. At the same time, ECB council member Axel Weber stated that “as the economy improves, we’ll take some of the exceptional measures bank,” but we may see the central bank maintain a dovish outlook for future policy as they maintain their one and only mandate to ensure price stability.

December 2009 German Unemployment Change

Job losses in Germany unexpectedly slipped in December as businesses increased their rate of production, with the number of individuals out of work declining 3K after slipping a revised 1K the month prior. However, serving as a lagging indicator, unemployment is expected to rise at a moderate pace even as the economy recovers from its deepest recession since World War II as policy makers see a risk for a protracted recovery. Indeed, it is too soon to call this short term rebound a strong consumer recovery as uncertainty in the labor markets paired with tight credit conditions weighs on the outlook for future growth.  Looking ahead, investors are weighing in a zero-percent chance that the ECB will raise the benchmark interest rate 25 basis points at its next rate decision, according to the Credit Suisse overnight index rate swaps.

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

Unemployment in Germany is forecasted to increase 16K in February as businesses keep a lid on production, and the data is likely to weigh on the exchange rate as policy makers continue to see a risk for a protracted recovery. The preliminary GDP report showed economic activity unexpectedly stalled in the four-quarter, driven by the ongoing slump in consumption and investments, and the weakness in the private sector may continue to drag on the recovery as the government stimulus tapers off. At the same time, business confidence unexpectedly weakened for the first time in 11 months, with the IFO survey slipping to 95.2 in February from 95.8 in the previous month, while industrial outputs tumbled 2.6% in December as factory orders weakened 2.3% during the same period. As a result, Bundesbank President Axel Weber held a cautious outlook for the region and saw a risk for the growth rate to “move sideways or even contract slightly in the first quarter,” but expects GDP in the second-quarter to “be pushed up by the catch-up process” as the economy emerges from the recession.

Moreover, Mr. Weber said that the “recovery should only accelerate in the course off the year 2011” and expects to see a “moderate” pick-up in economic activity this year as he anticipates the labor market to “worsen” over the coming months. Nevertheless, the Bundesbank noted that the recovery remains “intact” and saw little risks for medium-term inflation, and subdued price growth could lead the European Central Bank to maintain a dovish outlook for future policy as they maintain their one and only mandate to ensure price stability. The European Central Bank held borrowing costs at the record-low of 1.00% in February, and reiterated that the interest rates remain appropriate as the risks for the economy remain broadly balance. However, the central bank noted that “high levels of public deficits and debt place an additional burden on monetary policy” in its monthly report, and we may see the central bank maintain its current policy in March as Governing Council aim to encourage a sustainable recovery.

Trading the given event risk favors a bearish outlook for the euro as market participants expect the German labor market to weaken further, but price action following an enhanced employment report could drive the single-currency higher as growth prospects improve. Therefore, if unemployment unexpectedly holds flat or contracts in February, we will look for a green, five-minute candle subsequent to the release to generate a buy entry on two-lots of EUR/USD. Once these conditions are fulfilled, 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 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 an effort to preserve our profits.

On the other hand, the fears of a protracted recovery paired with the ongoing slack in the domestic economy may lead businesses to take additional steps to lower their cost structure, and a rise in unemployment is likely to weigh on the exchange rate as policy makers see a risk for economic activity to contract in the first quarter. As a result, if the number of individuals out of a job increase 16K or higher from the previous month, 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 laid out above, just in reverse.

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