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EUR/USD Risks Another Test of Key Support as U. of Michigan Improves

By , Currency Analyst  and Gregory Marks
16 May 2014 10:00 GMT

- U. of Michigan Confidence to Improve for Second Consecutive Month.

- Print of 84.5 Would Mark the Highest Reading Since July.

Trading the News: U. of Michigan Confidence

A second straight rise in the U. of Michigan Confidence survey may spur a further decline in the EUR/USD as the ongoing improvement in the world’s largest economy puts increased pressure on the Federal Reserve to normalize monetary policy sooner rather than later.

What’s Expected:

EUR/USD U. of Michigan Confidence

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Why Is This Event Important:

Despite expectations for a rate hike in 2015, a further pickup in household sentiment may undermine the Fed’s scope to retain the zero-interest rate policy (ZIRP) well into the following year, and a positive development may help to paint a more bullish outlook for the dollar as it raises the outlook for growth and inflation.

Expectations: Bullish Argument/Scenario

Release

Expected

Actual

Consumer Credit (MAR)

$15.500B

$17.529B

Change in Non-Farm Payrolls (APR)

218K

288K

ADP Employment Change (APR)

210K

220K

The ongoing improvement in the labor market along with the expansion in private sector lending may encourage a further pickup in consumer sentiment, and a better-than-expected print may generate a more bearish outlook for the EUR/USD as it raises the prospects for a stronger recovery.

Risk: Bearish Argument/Scenario

Release

Expected

Actual

Consumer Price Index Core (YoY) (APR)

1.7%

1.8%

Average Hourly Earnings (YoY) (APR)

2.1%

1.9%

Personal Consumption Expenditure Core (YoY) (MAR)

1.2%

1.2%

However, sticky inflation paired with subdued wage growth may drag household confidence, and a dismal U. of Michigan release may spur a more meaningful rebound in the EUR/USD as drags on interest rate expectations.

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How To Trade This Event Risk(Video)

Bullish USD Trade: U. of Michigan Survey Advances to 84.5 or Higher

  • Need to see red, five-minute candle following the release to consider a short trade on EURUSD
  • If market reaction favors a long dollar trade, sell EURUSD with two separate position
  • Set stop at the near-by swing high/reasonable distance from entry; look for at least 1:1 risk-to-reward
  • Move stop to entry on remaining position once initial target is hit; set reasonable limit

Bearish USD Trade: Household Confidence Falters

  • Need green, five-minute candle to favor a long EURUSD trade
  • Implement same setup as the bullish dollar trade, just in the opposite direction

Potential Price Targets For The Release

EUR/USD Daily

EUR/USD Daily Chart

Chart - Created Using FXCM Marketscope 2.0

  • Fails to Retain Bullish RSI Momentum- Close Below Support to Favor Bearish Outlook
  • Interim Resistance: 1.3960-70 (61.8% expansion)
  • Interim Support: 1.3650 (78.6 expansion) to 1.3660 (23.6 retracement)

Read More:

USD/JPY Needs Close Below 101.50 to Favor Bearish Forecast

Sea Change in Central Bank Policy Leaves EUR/JPY, GBP/JPY Vulnerable

Impact that the U. of Michigan Confidence has had on EUR/USD during the last release

Period

Data Released

Estimate

Actual

Pips Change

(1 Hour post event )

Pips Change

(End of Day post event)

APR P

2014

04/11/2014 13:55 GMT

81.0

82.6

+7

+8

April 2014 U. of Michigan Confidence Survey

EUR/USD Chart

The University of Michigan Confidence survey beat estimates last month coming in at 82.6 vs. 81.0 expected. The figure has failed to break 86 since 2007. Although not a large market mover, any major deviation from expectations could add to pressure on the greenback.

--- Written by David Song, Currency Analyst and Gregory Marks

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

To be added to David's e-mail distribution list, please follow this link.

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16 May 2014 10:00 GMT