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EUR/USD: Trading the Change in U.S. Consumer Confidence

EUR/USD: Trading the Change in U.S. Consumer Confidence

2010-03-29 09:40:00
David Song;Michael Wright,
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Trading the News: Change in U.S. Consumer Confidence

What’s Expected

Time of release:        03/30/2010 14:00 GMT, 10:00 EST
Primary Pair Impact :    EURUSD
Expected:         50.0
Previous:         46.0

Impact that the US Consumer Confidence report had on EURUSD through the last 2 months

ttn03.29d

February 2010 Change In U.S. Consumer Confidence

Household confidence in the U.S. tumbled to the lowest level since April 2009 as policy makers continue to see a risk for a protracted recovery, with the index slipping to 46.0 in February from a revised 56.5 in the previous month. As the outlook for future growth remains weak, the Fed is likely to keep interest rates near zero percent as central banks aim to cement economic recovery, and the FOMC may hold a dovish policy stance going in the second-half of the year as the MPC pledges to balance the risks for the economy. However, board member Thomas Hoenig dissented against the Fed’s comment to hold borrowing costs at the record-low for an “extended period” of time, and the central bank may look to normalize policy over the coming months as the expansion in monetary and fiscal policy continues to feed through the real economy. ttn03.29

January 2010 Change in U.S. Consumer Confidence

U.S. Consumer confidence soared to the highest level since September 2008 amid an improving labor market, which spurred an enhanced outlook for the world’s largest economy. The Confidence Board’s confidence index jumped to 55.9 in January from an upward revision of 53.6, exceeding economists’ forecasts for a fall to 53.5, and the reading provides an improved outlook for the region as it looks add fuel to consumer spending. However, Richmond Fed President Jeffrey Lacker stated that while employment “is likely to return to an upward trajectory” over the next few months, “even the more optimistic forecasters, though, do not expect a rapid improvement” as businesses remain reluctant to expand their labor force. ttn03.29b

What To Look For Before The Release
Traders with access to market depth information via the FXCM Active Trader Platform may use it to gauge the potency of the economic data release as well as to shed some light on the market’s directional bias. Increasing volume ahead of the announcement will telegraph likely follow-through behind whatever move is to materialize, while an imbalance in available liquidity on the Bid versus the Offer side of the market will tell us the direction major institutions are likely favoring ahead of the announcement:

Bullish Scenario:

If we see substantially deeper available liquidity on the Bid side of the market, this tells us that major price providers in the market are looking to buy the Euro against the US Dollar. Considering that close to 60% of all FX market volume is cleared through just six top banks, we see it prudent to be on the same side of the trade as major institutions and will favor a bullish bias on EURUSD ahead of the data release.
 
Bearish Scenario:

If we see substantially deeper available liquidity on the Offer side of the market, this tells us that major price providers in the market are looking to sell the Euro against the US Dollar. Considering that close to 60% of all FX market volume is cleared through just six top banks, we see it prudent to be on the same side of the trade as major institutions and will favor a bearish bias on EURUSD ahead of the data release.
 
00001_EUR 00002_EUR

How To Trade This Event Risk

The Conference Board’s consumer sentiment survey is expected to increase to 50.0 in March after slipping to 46.0 in the previous month, and the data is likely to reinforce an improved outlook for the world’s largest economy as private spending remains on the leading drivers of growth. A report by the Commerce Department showed retail sales unexpectedly increased 0.3% in February, with consumer credit advancing for the first time in a year, while the U. of Michigan confidence survey advanced to a finalized reading of 73.6 in March from an initial forecast of 72.5. However, the final 4Q GDP reading slipped to 5.6% amid expectations for a 5.9% expansion in the growth rate, with personal consumption increasing 1.6% versus forecasts for a 1.7% rise, and the deterioration in the labor market may continue to weigh on the outlook for future growth as policy makers continue to see a risk for a protracted recovery. The Fed’s Beige Book release earlier this month said economic conditions in nine of the twelve districts improved, with household consumption increasing “slightly” in most regions, while the central bank saw “minimal” wage growth paired with “weak” demands for borrowing, and policy makers held a cautious outlook for the economy as the labor demands remained “soft.”

As a result, the Federal Open Market Committee kept the benchmark interest rate at the record-low in March and reiterated its pledge to hold borrowing costs “exceptionally low” for an “extended period” as the central bank aims “to promote economic recovery and price stability.” In addition, the central bank continued to express concerns about the deterioration in the labor market as “employers remain reluctant to add to payrolls,” and expects inflation to remain “subdued for some time” as Fed Chairman Bernanke expects to see a “nascent” recovery this year. Meanwhile, the MPC noted that the “Federal Reserve has been closing the special liquidity facilities that it created to support markets during the crisis,” and the central bank is widely expected to normalize policy throughout the year as the outlook for growth and inflation improves. Moreover, Chicago Fed President Charles Evans said that the FOMC is likely to maintain an “accommodative” policy stance over “the next three or four meetings” in order to support the real economy, and the MPC may hold a dovish tone going into the second-half of the year as the private sector remains weak.

Trading the given event risk favors a bullish outlook for the greenback as market participants expect consumer confidence to rebound in March, and price action following the release could set the stage for a long dollar trade. Therefore, if the index advances to 50.0 or higher in March, we will need to see a green, five-minute candle following the release to confirm 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, 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 breakeven once the first trade reaches its mark in order to preserve our profits.

On the other hand, fears of a protracted recovery paired with the deterioration in the labor market may continue to drag on household sentiment, and an unexpected drop in the U. of Michigan confidence survey could weigh on the exchange rate as investors mull over the outlook for future growth. As a result, if the index slips to 44.0 or lower, we will favor a bearish outlook for the greenback, and will implement the same strategy for a short euro-dollar trade as the long position laid out above, just in reverse.

TTN

Questions? Comments? Join us in the DailyFX Forum

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


 

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