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EUR/USD: Trading the German Unemployment Report

By , Currency Analyst
29 June 2011 21:04 GMT

Trading the News: German Unemployment Change

What’s Expected:

Time of release: 06/30/2011 7:55 GMT, 3:55 EST

Primary Pair Impact: EURUSD

Expected: -17K

Previous: -8K

DailyFX Forecast: -10.0K to 10.0K

Why Is This Event Important:

Unemployment in Germany is expected to fall another 17K in June after contracting 8K in the previous month, and the ongoing improvement in the labor market could spark a bullish reaction in the euro as the fundamental outlook improves. As the economic recovery in Europe’s largest economy gathers pace, the European Central Bank may see scope to normalize monetary policy further in the second-half of the year, and the Governing Council is widely expected to deliver another rate hike in July as the group goes into ‘strong vigilance mode.’ However, the ECB may look to delay its exit strategy further as the European periphery face record-high financing costs, and the central bank may soften its hawkish tone for monetary policy at its next interest rate decision on July 7.

Recent Economic Developments

The Upside

Release

Expected

Actual

IFO – Business Climate (JUN)

113.4

114.5

Producer Prices (YoY) (MAY)

6.3%

6.1%

Factory Orders s.a. (MoM) (APR)

2.0%

2.8%

The Downside

Release

Expected

Actual

Purchasing Manager Index Manufacturing (JUN A)

57.0

54.9

Industrial Production s.a. (MoM) (APR)

0.2%

-0.6%

Trade Balance (APR)

14.9B

10.9B

The rebound in confidence paired with the expansion in factory orders may encourage businesses to increase their labor force, and the rise in private sector activity may encourage the central bank to toughen its stance against inflation as it aims to balance the risks for the region. However, the slowdown in world trade paired with the drop in production could produce a drop in employment, and firms may scale back on hiring in the second-half of the year as the global recovery cools. Should the recovery in the labor market come to a halt, European policy makers may look to soften their hawkish outlook for monetary policy, and the central bank may see scope to adopt a wait-and-see approach for the remainder of the year in an effort to stimulate growth.

Potential Price Targets For The Release

EURUSD_Trading_the_German_Unemployment_Report__body_ScreenShot010.png, EUR/USD: Trading the German Unemployment Report

How To Trade This Event Risk

As unemployment is expected to contract for 24 consecutive months in June, the ongoing improvement in the labor market could set the stage for a long euro trade as the recovery in Europe’s largest economy gathers pace. Therefore, if unemployment falls 17K or more 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 set the initial stop at the nearby swing low or a reasonable distance from the entry, 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 cost once the first trade reaches its mark in order to preserve our profits.

In contrast, the slowdown in global trade paired with the uncertainties surrounding the economic outlook may lead businesses to scale back on hiring, and a dismal labor report could spark a selloff in the exchange rate as growth prospects deteriorate. As a result, if unemployment pushes higher from the previous month, we will carry out the same setup for a short euro-dollar trade as the long position mentioned above, just in reverse.

Impact that the German Unemployment report has had on EUR during the last month

Period

Data Released

Estimate

Actual

Pips Change

(1 Hour post event )

Pips Change

(End of Day post event)

MAY 2011

5/31/2011 7:55 GMT

-30K

-8K

+5

-6

May 2011 Canada Net Change in Employment

Unemployment in Germany fell 8K in April to 2.97M, while the jobless rate pulled back to an annualized 7.0% from 7.1% in the previous month to mark the lowest reading since recordkeeping began in 1991. As the recovery in Europe’s largest economy gathers pace, the central bank may look to normalize policy further over the coming months, and the Governing Council may toughen its stance against inflation as growth accelerates. However, as the sovereign debt crisis continues to bear down on investor confidence, the European Central Bank may have little choice but to delay its exit strategy further, and President Jean-Claude Trichet may retain the emergency mechanisms over the remainder of the year as the European periphery face record-high financing costs. Although the slightly weaker-than-expected print, the EUR/USD advanced following the release as unemployment declined for 23 consecutive months, but the rally was certainly short-lived as the exchange rate fell back to 1.4396 at the close.

EURUSD_Trading_the_German_Unemployment_Report__body_ScreenShot009.png, EUR/USD: Trading the German Unemployment Report

Questions? Comments? Join us in the DailyFX Forum

Join Technical Currency Strategist Joel Kruger in the DailyFX Trading Room to cover the event LIVE!

View the Expo Presentation on ‘Trading the News’ For Additional Resources

To discuss this report contact David Song, Currency Analyst: dsong@dailyfx.com

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29 June 2011 21:04 GMT