EUR/USD: Trading the Euro-Zone Sentix Investor Confidence Survey

Trading the News: Euro-Zone Sentix Investor Confidence Survey

Why Is This Event Important:

As market participants expect investor confidence in the Euro-Zone to improve further in November, the data could spark a bullish reaction in the euro as the outlook for future growth improves. However, as the governments operating under the single-currency struggle to manage their public finances, with European policy makers maintaining a cautious outlook for the region, investor sentiment could falter heading into the end of the year as the central bank sees the economic recovery slowly tempering off.

What’s Expected:

Time of release:11/08/2010 9:30 GMT, 4:30 EST

Primary Pair Impact :EURUSD

Expected: 10.0

Previous: 8.8

Will This Be Market Moving (Scenarios):

The Sentix investor confidence survey is forecasted to increase to 10.0 in November from 8.8 in the previous month, which would mark the highest reading since December 2007, and conditions may improve throughout the remainder of the year as the central bank continues to support the real economy. A second consecutive rise in the survey could reignite a short term rally in the EUR/USD as the economic outlook improves, and the exchange rate may pare the sharp decline from Friday as price action holds above the 61.8% Fibonacci retracement from the 2009 high to the 2010 low around 1.3890-1.3900.

The Upside

After holding the benchmark interest rate steady at 1.00% in November, the European Central Bank pledge to unwind the emergency measures as they are “transitory by nature,” and the data could encourage speculation for a rate hike next year as the central bank looks to reestablish its exit strategy in the beginning of 2011. A rise in interest rate expectations would reinforce a bullish outlook for the single-currency, and the EUR/USD may continue to retrace the decline from earlier this year as the Federal Reserve adds another $600B in quantitative easing.

The Downside

As the annual rate of unemployment holds at a 12-year high of 10.1%, with businesses scaling back their rate of production, the slower pace of economic activity could weigh on investor confidence as the economic outlook remains clouded with uncertainties. An unexpected drop in the Sentix survey could drag on the exchange rate as growth prospects falter, and the EUR/USD may fall back towards the 61.8% Fib around 1.3890-1.3900 to test for near-term support.

How To Trade This Event Risk

Expectations for a second consecutive rise in investor sentiment certainly favors a bullish bias for the single-currency, and price action following the release could set the stage for a long euro trade as the outlook for future growth improves. Therefore, if the Sentix survey advances to 10.0 or higher in November, we will need a green, five-minute candle following the data to establish 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 generate our first target. The 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 mark in order to preserve our profits.

In contrast, the pullback in production paired with the ongoing slack within the private sector could weigh on investor confidence, and a dismal report could trigger increased selling pressures on the single-currency as growth prospects deteriorate. As a result, if the Sentix index falls back to 7.0 or lower from the previous month, we will look to implement the same strategy for a short euro-dollar trade as the long position mentioned above, just in reverse.

Potential Price Targets For The Release

Impact that the Sentix survey has had on EUR during the last month

October 2010 Sentix Investor Confidence Survey

Investor confidence in the Euro-Zone rose to its highest level since December 2007, with the Sentix survey advancing to 8.8 in October from 7.6 in the previous month, which topped expectations for an 8.0 print. A deeper look at the report showed the gauge for future expectations increased to 2.75 from 0.50 during the same period, while the index for the current situation held steady at 15.00 for the second month, and the data encourages an improved outlook for the region as policy makers expect the recovery to carry into the following year. However, as the governments operating under the fixed-exchange rate system struggle to manage their public finances, the European Central Bank may look to support the economy throughout the beginning of 2011 as policy makers expect price pressures to remain subdued over the medium-term. At the same time, market participants speculate the Governing Council to reestablish its exit strategy over the coming months as the region benefits from the rebound in global trade, and interest rate expectations could play an increased role in driving price action in the single-currency as investors weigh the prospects for future policy.

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