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Trading the US GDP With the EURUSD

By , Chief Currency Strategist
26 July 2007 17:39 GMT

Trading the News: US Gross Domestic Product

What is Expected
Time of release:         08:30 EST, 12:30 GMT 7/27/2007
Primary Pair Impact : EUR/USD
Expected:                    1.8%
Previous:                     2.5%

Effect of US Gross Domestic Product on EUR/USD For Past 3 Periods

Trading the News 07-26-2007 A

Trading the News 07-26-2007b

How To Trade This Event Risk

The US dollar has steadily worked its way to new multi-year lows over the past few months, leading to a heated debate between those traders calling the market overbought and ready for a turn of trend any day versus those saying the dollar’s woes have only just begun. One thing that is certain, the dollar’s losses have been consistent and gradual, facilitating low volatility and increased leverage. With the dollar hovering above another level of major support, another opportunity to turn the dollar has come in the form of the GDP release. Growth cooled significantly over the first quarter of the year – with significant downward revisions that further exacerbated already existing bearish sentiment. When the market and Fed’s Board of Governors caught onto these numbers, speculation for further rate hikes immediately disappeared and even evolved into forecasts of an eventual cut. So far, the FOMC has held to its consistent warnings on inflation and its need to hold its mild hawkish policy stance. This sets up the second quarter’s growth report. Should the indicator improve on pace as expected (or accelerate more than expected) it could relieve some of the pressure on the rate curve and finally turn the greenback. On the other hand, if the indicator prints near or below the previous quarter’s read it could shake out the few remaining bulls still hanging on.

In the past few days, the dollar rebounded to give itself some considerable buffer room from its recent all-time lows against the euro. While the dollar will still find a considerable fundamental boost from the GDP report, this buffer could dull the immediate reaction on the release. A rebound in growth that is in between the first quarter print and the market’s consensus for the second quarter would likely be construed as a positive outcome which could eventually push EURUSD below 1.3685.  However, an immediate break with momentum behind it would best be won with a better than expected increase in growth trends. Under these conditions a short with two lots should be taken after confirmation of a five minute red candle. A stop should be at the immediate swing high. The first target should be equal to the distance of the risk. The second target should be discretionary and its stop should be moved up to break even when profit on the first lot is taken.

A disappointing growth report that is in line or below the first quarter level would certainly be construed as bearish. A confirmation of a five minute green bar would confirm a EURUSD move higher. A first target of 1.3850 would not be hard to capture. However, a move beyond these highs would likely be slow and gradual; so a move beyond this level would not likely work into a short-term trade.

Trading the News 07-26-2007c

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26 July 2007 17:39 GMT