EUR/USD: Trading the German IFO Business Confidence Survey

Trading the News: German IFO - Expectations

Why Is This Event Important:

However, as policy makers in Europe hold an improved outlook for the region and expect the recovery to pick up pace in the second-half of the year, firms may turn increasingly optimistic towards the economy as the region benefits from the rebound in global trade.

What’s Expected:
Time of release:        07/23/2010 8:00 GMT, 4:00 EST
Primary Pair Impact :    EURUSD
Expected:         101.6
Previous:         102.4

Will This Be Market Moving (Scenarios):

The IFO’s confidence survey is expected to show its gauge for future expectations fall back to 101.6 in July from 102.4 in the previous month, and the ongoing weakness in European financial system paired with the mixed outlook for global growth could weigh on business sentiment going forward. As the prospects for future growth deteriorates, the European Central Bank is likely to maintain a loose policy stance over the coming months, and see scope to keep the benchmark interest rate at the record low of 1.00% going into 2011 as President Jean-Claude Trichet expects inflation to remain subdued going forward.

The Upside

As the German central bank raises its outlook for future growth and expects to see “extraordinarily strong” growth in the second-quarter, firms may hold an improved outlook for the economy as the recovery gathers pace. As a result, an unexpected rise in the gauge for future expectations could lead the euro to pare the decline from earlier this week and push the exchange rate back towards the 100-Day SMA at 1.2892.

The Downside

At the same time, the uncertainties surrounding the prospects for global growth paired with the tightening in fiscal policy could certainly lead to a drop in business sentiment, and firms may look to keep a lid on production and employment going forward as the private sector remains weak. Therefore, the ECB is likely to maintain a dovish outlook for future policy and support the economy throughout 2010 as the central bank aims to balance the risks for the region.

How To Trade This Event Risk

Trading the given event risk may not be as clear cut as some of the previous trades but nevertheless, an enhanced confidence report could set the stage for a bullish euro trade as growth prospects improve. Therefore, if the index advances to 103.0 of higher, we will need to see a green, five-minute candle subsequent to 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 the first objective. The 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 mark in order to preserve our profits.

In contrast, fears accompanying the European debt crisis paired with the mixed prospects for global growth could lead to a drop in business sentiment, and the euro could come under pressure following a dismal confidence report as investors weigh the economic outlook for the region. As a result, if the gauge for future expectations slips to 101.6 or lower in July, 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.

Impact German IFO Survey has had on EUR during the previous month

June 2010 German IFO Business Survey - Expectations

The IFO’s index for business confidence in Germany unexpectedly increased to a two-year high of 101.8 in June from 101.5 in the previous month, while the gauge for future expectations slipped to 102.4 from 103.7 in May, and data reinforces a mixed outlook for Europe’s largest economy as policy makers expect to see an uneven recovery this year. Nevertheless, the Bundesbank raised its growth forecast and expects the economy to expand1.9% this year amid an initial projection for a 1.6% rise in GDP, and conditions are likely to improve going forward as the region continues to benefit from the rise in global trade. However, as the governments operating under the euro struggle to manage their public finances, the European Central Bank is widely expected to maintain a dovish policy stance over the coming months, and may look to hold the benchmark interest rate at 1.00% throughout the second-half of 2010 as it aims to encourage a sustainable recovery.

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