EUR/USD: Trading the U. of Michigan Confidence Survey

Trading the News: U. of Michigan Confidence Survey

Why Is This Event Important:

Consumer confidence in the U.S. is expected to improve for the second consecutive month in December, and the data is likely to instill an enhanced outlook for the world’s largest economy as private sector consumption remains one of the leading drivers of growth. As the economic recovery gradually gathers pace, the rise in household sentiment could spark a bullish reaction in the greenback, but the U.S. dollar could face headwinds following the release as risk trends continue to dictate price action in the currency market.

What’s Expected:

Time of release:12/10/2010 14:55 GMT, 9:55 EST

Primary Pair Impact :EURUSD

Expected: 72.5

Previous: 71.6

Will This Be Market Moving (Scenarios):

The preliminary U. of Michigan consumer confidence survey is forecasted to increase to 72.5 in December from 71.6 in the previous month, and conditions are likely to improve going forward as Federal Reserve takes additional steps to encourage a sustainable recovery. As the FOMC embarks on additional monetary easing, the efforts should help to stem the downside risks for growth, but the ongoing weakness within the labor market could weigh on consumer sentiment as Americans face tightening credit conditions paired with a depressed housing market.

The Upside

The preliminary GDP reading showed economic activity increased at an annualized pace of 2.5% in the third quarter amid an initial forecast for a 2.0% expansion, with personal consumption rising at the fastest pace since 2006, and the recovery is widely expect to carry into the following year as the Fed sees economic activity strengthening in most of the 12 districts. A marked improvement in household sentiment should lead the EUR/USD to extend the decline from earlier this, and the exchange rate may fall back towards the 200-Day moving average at 1.3115 as it continues to search for support.

The Downside

However, the ongoing weakness in the housing market paired with the protracted recovery in U.S. employment may lead households to turn increasingly pessimistic towards the economy, and the central bank may take additional steps to stimulate growth as the fundamental outlook remains clouded with uncertainties. A dismal confidence report could lead the U.S. dollar to weaken against its major counterparts and push the EUR/USD back towards the 20-Day SMA at 1.3373 as price action continues to hold above the 38.2% Fibonacci retracement from the 2009 high to the 2010 low around 1.3100-20.

How To Trade This Event Risk

Expectations for a second consecutive rise in consumer confidence reinforces a bullish outlook 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 the U. of Michigan survey advances to 72.5 or higher in December, we will need to see a red, five-minute candle following the release to generate a sell entry on two-lots of EUR/USD. Once these conditions are fulfilled, we will set the initial stop at the nearby swing high or a reasonable distance from the entry, 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 order to preserve our profits.

On the other hand, the ongoing slack within the private sector paired with the uncertainties surrounding the fundamental outlook may lead households to turn increasingly pessimistic towards the economy, and an unexpected drop on consumer confidence could weigh on the exchange rate as growth prospects deteriorate. As a result, if the survey falls back to 70.0 or lower from the previous month, we will carry out the same setup for a long euro-dollar trade as the short position mentioned above, just in reverse.

Potential Price Targets For The Release

Impact that U. of Michigan Confidence survey has had on USD during the last month

November 2010 U. of Michigan Confidence Survey

Consumer confidence in the U.S. advanced to a five-month high in November, with the U. of Michigan survey increasing to 69.3 from 67.7 in the previous month, and the data reinforces an improved outlook for the world’s largest economy as private sector spending remains one of the leading drivers of growth. The breakdown of the report showed inflation expectations for one-year ahead increased to 3.0% from 2.7% in October, while the gauge for measuring the economic outlook advance to 79.7 from 76.6 to mark the highest reading since June. As the recovery gradually gathers pace, the Federal Reserve may raise its fundamental assessment for the nation, but the ongoing slack within the labor market is likely to bear down on the recovery as consumers face tightening credit conditions paired with the depressed housing market. In turn, the Fed is likely to support the real economy going into 2011, and the central bank may look to complete the additional $600B in quantitative easing over the coming months as it aims to balance the downside risks for the region.

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