EUR/USD: Trading the U.S. Preliminary 3Q GDP Report

Trading the News: U.S. Preliminary 3Q GDP

Why Is This Event Important:

As market participants expect economic activity in the U.S. to expand at a faster pace in the third-quarter, the data could spark a bullish reaction in the greenback as the outlook for future growth improves. As the recovery gradually gathers pace, the Fed may revise its fundamental assessment, and the central bank may see scope to limit its asset purchases over the coming months as policy makers expect the rebound in economic activity to carry into the following year.

What’s Expected:

Time of release:11/23/2010 13:30 GMT, 8:30 EST

Primary Pair Impact :EURUSD

Expected: 2.4%

Previous: 2.0%

Will This Be Market Moving (Scenarios):

The preliminary GDP report is expected to show the world’s largest economy growing at an annualized rate of 2.4% in the third quarter amid an initial forecasts for a 2.0% expansion in the growth rate, while personal consumption is expected to increase 2.5% versus an advanced projection for a 2.6% rise in spending. As private sector spending remains one of the leading drivers of growth, the downward revision in personal consumption could spark mixed price action in the U.S. dollar despite the higher growth rate, and the uncertainties surrounding the economic outlook could spark speculation for further easing as the central bank continues to see a substantial amount of slack within the private sector.

The Upside

A report by the U.S. Commerce Department showed retail sales increased for the fourth consecutive month in October, with personal spending increasing throughout the third-quarter, and conditions are likely to improve going into the following year as the central bank continues to support the real economy. An upward revision in GDP paired with a higher rate of consumption could lead the U.S. dollar to strengthen against its major counterparts, and push the EUR/USD back towards the August high at 1.3333.

The Downside

However, as households cope with tightening credit conditions paired with the highest rate of unemployment since the 1980’s, the ongoing slack within the private sector could bear down of the recovery and lead the Fed to fully implement the additional $600B in quantitative easing as it aims to balance the downside risks for the economy. A dismal growth report could trigger a sharp selloff in the U.S. dollar as the outlook for growth and inflation deteriorate, and the EUR/USD may work its way back towards the 20-Day moving average at 1.3836 to test for resistance.

How To Trade This Event Risk

Expectations for an upward revision in the growth rate certainly favors a bullish bias for the greenback, and price action following the release could set the stage for a long U.S. dollar trade as growth prospects improve. Therefore, if GDP expands 2.4% or greater in the third quarter, we will need to see a red, five-minute candle following the data to confirm a sell 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 after taking market volatility into account, and this risk will establish 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 ongoing weakness in the labor market paired with the uncertainties surrounding the fundamental outlook could bear down on the recovery, and a dismal GDP report is likely to drag on the exchange rate as investors weigh the prospects for a sustainable recovery. As a result, if the growth rate holds steady at 2.0% or unexpectedly weakens from the advance reading, we will implement the same setup for a long euro-dollar trade as the short position laid out above, just in reverse.

Potential Price Targets For The Release

Impact that the preliminary U.S. GDP report has had on USD during the last quarter

2Q 2010 U.S. Preliminary GDP

The preliminary GDP report showed the world’s largest economy grew an annualized 1.6% in the second quarter amid an initial forecast for a 2.4% rise, while personal consumption increased 2.0% versus earlier projections for a 2.0% expansion. The downward revision in the growth rate reinforces a weakened outlook for the economy as businesses keep a lid on production and employment, and the Federal Reserve may expand monetary policy further in the second-half of the year as the central bank aims to encourage a sustainable recovery. Fed Chairman Ben Bernanke reassured that the central bank stands ready to provide additional monetary stimulus “if it proves necessary,” and the FOMC may preserve its dovish outlook for future policy given the ongoing weakness within the private sector. As the Fed maintains its pledge to hold borrowing costs close to zero for an “extended” period of time, interest rate expectations are likely to deteriorate further over the coming months, which could fuel additional weakness in the greenback as investors weigh the prospects for monetary 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