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FOREX NEWS: Trading the Advance 3Q U.S. GDP Report

By , Currency Analyst
25 October 2012 19:00 GMT

Trading the News: U.S. Gross Domestic Product

What’s Expected:

Time of release: 10/26/2012 12:30 GMT, 8:30 EDT

Primary Pair Impact: EURUSD

Expected: 1.8%

Previous: 1.3%

DailyFX Forecast: 1.6% to 2.2%

Why Is This Event Important:

The advanced GDP report is expected to show the world’s largest economy expanding at an annual rate of 1.8% in the third-quarter, and the faster rate of growth should increase the appeal of the U.S. dollar as it curbs bets for additional monetary support. As the recover gradually gathers pace, we should see the FOMC preserve its current policy over the remainder of the year, but a growing number of Fed officials may scale back their dovish tone for monetary policy as the region gets on a more sustainable path.

Recent Economic Developments

The Upside

Release

Expected

Actual

Durable Goods Orders (SEP)

7.5%

9.9%

Advance Retail Sales (SEP)

0.8%

1.1%

Consumer Credit (AUG)

$7.250B

$18.123B

The Downside

Release

Expected

Actual

Pending Home Sales (MoM) (SEP)

2.5%

0.3%

Change in Non-Farm Payrolls (SEP)

115K

114K

Personal Income (AUG)

0.2%

0.1%

The resilience in private sector consumption along with the rebound in consumer credit certainly bodes well for the U.S. economy as household spending remains one of the leading drives of growth, and a positive development should prop up the dollar as it dampens the Fed’s scope to expand its balance sheet further. However, the ongoing slack in the housing market paired with the protracted recovery in employment may continue to drag on economic activity, and the FOMC may keep the door open to ease policy further in an effort to encourage a stronger recovery.

Potential Price Targets For The Release

FOREX_NEWS_Trading_the_Advance_3Q_U.S._GDP_Report_body_ScreenShot093.png, FOREX NEWS: Trading the Advance 3Q U.S. GDP Report

As the EURUSD breaks out of the upward trending channel from the end of July, the double-top formation should continue to take shape, and we may see the euro-dollar threaten the 200-Day SMA (1.2833) should the GDP report dampen speculation for a further expansion in the Fed’s balance sheet. However, we will be keeping a close eye on the relative strength index as it comes up against trendline support, and we would need to see the oscillator break the bullish trend for the euro-dollar to fall back towards the 23.6% Fibonacci retracement from the 2009 high to the 2010 low around 1.2640-50.

How To Trade This Event Risk

Forecasts for a faster rate of growth instills a bullish outlook for the greenback, and a positive development may pave the way for a long U.S. dollar trade as the data dampens speculation for additional monetary support. Therefore, if the growth rate expands 1.8% or greater in the third-quarter, we will need to see a red, five-minute candle following the print to establish a sell entry on two-lots of EURUSD. 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 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 hits its mark in order to preserve our profits.

In contrast, the ongoing weakness in housing along with the protracted recovery in the labor market may continue drag on the economy, and a dismal growth report may spark a bearish reaction in the USD as it fuels speculation for more quantitative easing. As a result, if GDP falls short of market expectations, we will carry out the same strategy for a long euro-dollar trade as the short position mentioned above, just in reverse.

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

Period

Data Released

Estimate

Actual

Pips Change

(1 Hour post event )

Pips Change

(End of Day post event)

2Q A 2012

7/27/2012 12:30 GMT

1.4%

1.5%

-3

-4

2Q 2012 Advanced U.S. GDP

FOREX_NEWS_Trading_the_Advance_3Q_U.S._GDP_Report_body_ScreenShot092.png, FOREX NEWS: Trading the Advance 3Q U.S. GDP Report

Economic activity in the U.S. increased 1.5% in the second-quarter amid forecasts for a 1.4% print, while personal consumption advanced another 1.5% during the same period after expanding a revised 2.4% in the first three-months of 2012. The initial reaction to the better-than-expected GDP report was short-lived, with the EURUSD quickly trading back above the 1.2300 figure, but we saw the pair consolidate throughout the North American session as the exchange rate ended the day at 1.2314.

--- Written by David Song, Currency Analyst

To contact David, e-mail dsong@dailyfx.com. Follow me on Twitter at @DavidJSong

To be added to David's e-mail distribution list, send an e-mail with subject line "Distribution List" to dsong@dailyfx.com.

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25 October 2012 19:00 GMT