EUR/USD: Trading the German IFO Business Confidence Survey

Trading the News: German IFO Survey - Expectations

Why Is This Event Important:

However, as the economic recovery in Europe gathers pace, another unexpected rise in the IFO survey could spark a bullish reaction in the EUR/USD as policy makers hold an improved outlook for the region.

What’s Expected:

Time of release:08/25/2010 8:00 GMT, 4:00 EST

Primary Pair Impact :EURUSD

Expected: 104.3

Previous: 105.5

Will This Be Market Moving (Scenarios):

The IFO businesses confidence survey is forecasted to fall back to 105.7 from 106.2 in July, with market participants projecting the gauge for future expectations to weaken to 104.3 from 105.5 during the period, and firms may hold a cautious outlook for future growth as policy makers expect to see an “uneven” recovery going forward. Given the three separate releases from the IFO, we will primarily focus on the forward-looking gauge of future expectations as investors weigh the prospects for future growth.

The Upside

As Germany expands at a record-pace in the second quarter, with the region continuing to benefit from the rise in global trade, there could be another unexpected rise in business confidence as the recovery gathers pace. Accordingly, there could be a bullish reaction in the euro, which could lead the EUR/USD to cross back above the 50-Day SMA at 1.2745, but risk trends will certainly play a great role in driving price action for the currency market as the U.S. dollar maintains its strong ties to market sentiment.

The Downside

On the other hand, the ongoing weakness in private sector spending paired with the drop in the rate of production suggest firms are becoming less confident in the recovery as the government withdraws fiscal support and plans to tackle the budget deficit, and a drop in business sentiment could generate a bearish reaction in the EUR/USD as it struggles to retrace the decline from the previous week. As a result, the euro-dollar may weaken further and break below the August low at 1.2586, and look to test the 1.2500 level for psychological support.

How To Trade This Event Risk

Forecasts for a drop in German business confidence certainly favors a bearish outlook for the single-currency but, an unexpected rise in the IFO survey could set the stage for a long euro trade as growth prospects improve. Therefore, if the gauge for future expectations advance to 106.5 of higher, we will need to see a green, five-minute candle following the release to establish a long entry on two-lots of EUR/USD. Once these conditions are met, will set the initial stop at the nearby swing low or a reasonable distance, and this risk will generate our first target. The second objective will be based on discretion, and we will move the stop on the second-lot to cost once the first trade reaches its target in an effort to lock-in our profits,

In contrast, the ongoing weakness in the private sector paired with the tightening in fiscal policy could weigh on the economic outlook, and a dismal IFO survey could drag on the exchange rate as the prospects for future growth deteriorates. As a result, if the index slips to 105.5 or lower, we will favor a bearish outlook for the single-currency, and will implement the same strategy for a short euro-dollar trade as the long position laid out above, just in reverse.

Potential Price Targets For The Release

Impact that the German IFO Survey has had on EUR during the last month

July 2010 German IFO Survey

Business confidence in Germany unexpectedly pushed to a three-year high in July, with the IFO survey increasing to 106.2 from 101.8 in the previous month, while the gauge for future expectations advance to 105.5 from a revised 102.5 amid forecasts for a drop to 101.6. The data reinforces an improved outlook for Europe’s largest economy as policy makers expected the rebound in economic activity to gather pace over the coming months, and business sentiment may continue to push higher throughout the second-half of the year as the region benefits from the rise in global trade. However, as the governments operating under the single-currency struggle to manage their public finances, the European Central Bank is likely to maintain the expansion in monetary policy and support the economy going forward, and President Jean-Claude Trichet is likely to retrain his dovish outlook as he expects price growth to remain subdued over the medium-term.

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