EUR/USD: Trading the U.S. 2Q GDP Report

Trading the News: U.S. GDP

What’s Expected:

Time of release: 07/29/2011 12:30 GMT, 8:30 EST

Primary Pair Impact:EURUSD

Expected: 1.8%

Previous: 1.9%

DailyFX Forecast: 1.8% to 2.2%

Why Is This Event Important:

The advanced 2Q GDP report is anticipated to show the world’s largest economy expanding at an annualized pace of 2.0%, and the slower pace of growth could fuel a bearish reaction in the U.S. dollar as the fundamental outlook deteriorates. As Americans face a tepid recovery, we are likely to see the Fed endorse its zero interest rate policy throughout the remainder of the year, and the central bank may curb its willingness to wind down its balance sheet as we’re also expected to see private sector consumption increasing at the slowest pace since the economic contraction back in 2009. As growth prospects deteriorate, the FOMC may carry its wait-and-see approach well into the following year, and the committee may open the door to conduct another round of quantitative easing in order to stimulate the ailing economy. However, as the Fed expects the economic recovery to gather pace in the second-half of the year, the central bank may see scope to implement its exit strategy over the coming months, and the central bank may toughen its stance against inflation as it holds above the 2% target.

Recent Economic Developments

The Upside

The Downside

The rebound in household sentiment paired with the ongoing expansion in consumer credit should help to encourage private sector activity, and the central bank may hold an improved outlook for future growth should the report could reflect a strengthening recovery. However, the drop in business investments paired with the weakness in the labor market could produce a marked slowdown in economic activity, and a dismal growth report could encourage the Fed to expand its balance sheet further in order to encourage a sustainable recovery. In turn, speculation for QE3 are likely to sap demands for the greenback, and currency traders may turn increasingly bearish towards the reserve currency as interest rate expectations deteriorate.

Potential Price Targets For The Release

How To Trade This Event Risk

Forecasts for a slower pace of growth reinforces a bearish bias for the greenback, but an enhanced GDP report could set the stage for a long U.S. dollar trade as the fundamental outlook improves. As a result, if the economy expands at an annual pace of 1.9% or greater in the second-quarter, we will need a red, five-minute candle following the report to establish a sell entry on two-lots of EUR/USD. Once these conditions are met, we will set the initial stop at the nearby swing high or a reasonable distance from the entry, and this risk will generate our first objective. The second target 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 protect our profits.

On the other hand, the slowdown in business spending paired with ongoing weakness within the labor market could bear down on the economic activity, and the GDP report may highlight a dour outlook for the U.S. as growth prospects deteriorate. Therefore, if the economy expands less than 1.8%, we will carry out the same strategy for a long euro-dollar trade as the short position laid out above, just in reverse.

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

1Q 2011 Advanced U.S. GDP

The advanced 1Q GDP report for the world’s largest economy showed the growth rate expanding at an annual pace of 1.8% in the first three-months of 2011, while personal consumption jumped 2.7% during the same period to exceed forecasts for a 2.0% rise. At the same time, government spending tumbled 5.2%, marking the biggest decline since 1983, while gross private investments increased 8.5% after contracting 18.7% during the last three-months of 2010. As the data shows a slowing recovery in the U.S., the Fed is likely to preserve the expansion in monetary policy, but the central bank may start to wind down its balance sheet in the second-half of the year as it plans to withdraw the additional $600B in quantitative easing at the end of June. However, we may see the FOMC retain its zero interest rate policy throughout the remainder of the year as it aims to encourage a sustainable recovery. The U.S. dollar lost ground immediately following the report, with the EUR/USD pushing back above 1.4800, and the greenback continued to lose ground during the North American trade as the exchange rate settled at 1.4822 at the end of the day.

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