EUR/USD: Trading the Change in German Unemployment

Trading the News: German Unemployment Change

Why Is This Event Important:

Bundesbank President Axel Weber maintained an improved outlook at Fed summit in Jackson Hole, Wyoming, and said Europe is “bordering on a self-sustaining recovery,” but went onto say that the austerity measures remain “a continuing challenge” as governments operating under the fixed-exchange rate system struggle to manage public finances.

What’s Expected:

Time of release:08/31/2010 7:55 GMT, 3:55 EST

Primary Pair Impact :EURUSD

Expected: -20.0K

Previous: -20.0K

Will This Be Market Moving (Scenarios):

Unemployment in Europe’s largest economy is forecasted to fall another 20.0K in August, while market participants project the jobless rate to hold steady at 7.6% for the second month, and conditions are likely to improve throughout the remainder of the year as the Bundesbank expects the economic recovery to gather pace. As the region continues to benefit from the rise in global trade, central bank President Axel Weber held an improved outlook for the region and expects the European Central Bank to raise its growth forecast for the region, but the euro may show little reaction to the release as the Governing Council is scheduled to announce its rate decision on Thursday at 11:45 GMT.

The Upside

As economic activity in Germany expands at a record pace, with business confidence pushing to a three-year high, firms may look to increase employment at a faster pace as growth prospects improve. Accordingly, The Bundesbank raised its economic outlook and forecasts GDP to expand 3% this year amid an initial forecasts for a 1.9% rise in the growth rate, and the recovery may gather pace over the coming months as the central bank sees “a gradual stabilization of private consumption.” As a result, the ECB may revise its economic assessment over the coming months and see scope to normalize monetary policy further in the following year as the Governing Council expects to see a moderate recovery going forward.

The Downside

However, as the government withdraws fiscal support, with households keeping a lid on spending, businesses may curb their temperament to increase their labor force as the outlook for the global economy remains clouded with uncertainties. As a result, a dismal employment report could spark a bearish reaction in the EUR/USD and lead the pair to retrace the advance from July as the austerity measures poses a risk to the recovery.

How To Trade This Event Risk

Expectations for an improvement in Germany’s labor market favors a bullish outlook for the single-currency, and price action following the data could set the stage for a long euro trade as the outlook for future growth improves. Therefore, if unemployment drops 20K or greater from the previous month, we will need a green, five-minute candle following the release to generate a buy entry on two-lots of EUR/USD. Once these conditions are met, we will place the initial stop at the nearby swing low or a reasonable distance, and this risk will establish our 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 an effort to lock-in our profits.

On the other hand, fears surrounding the outlook for the global economy paired with the tightening in fiscal policy may lead businesses to scale back on employment, and a dismal report could weaken the single-currency further as investors weigh the prospects for a sustainable recovery. As a result, if unemployment falls less than 5K or unexpectedly rises in rises in August, we will favor a bearish outlook for the European currency and will implement the same setup 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 change in German Unemployment has had on EUR during the last month

July 2010 German Unemployment Change

The German labor market improved for the 13th consecutive month in July, with unemployment falling another 20K from the previous month , while the jobless rate pulled back to 7.6% from 7.7% to mark the lowest level since November 2008. As the economic recovery gathers pace, businesses are likely to expand production and employment at a faster pace going forward, and policy makers may turn increasingly optimistic over the coming months as the region continues to benefit from the rise in global trade. As a result, the Bundesbank held an improved outlook for the economy and said that the “remarkable” improvement in employment will set the stage for a “gradual stabilization of private consumption,” but the ongoing weakness in the financial system could lead the European Central Bank to maintain a loose policy stance throughout the second-half of the year as governments operating under the single-currency struggle to manage their public finances.

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