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EUR/USD: Trading the Change in German Unemployment

EUR/USD: Trading the Change in German Unemployment

2010-03-30 06:51:00
David Song, Currency Strategist
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Trading the News: Change in German Unemployment

What’s Expected
Time of release:        03/31/2010  07:55 GMT, 03:55 EST
Primary Pair Impact :    EURUSD
Expected:         7K
Previous:         7K

Impact the German Unemployment Change has had on EURUSD over the last 2 months

hl03.30

February 2010 German Unemployment Change

Germany continued to shed jobs in February, with payrolls slipping 7K during the month subsequent to the 5K drop in January, which fell short of expectations for a 16K rise. At the same time, the jobless rate in the region rose to 8.2% from a downward revised 8.1% in the previous month, and the data reinforces a weakened outlook for future growth as the economy failed to grow in the fourth quarter, led by the ongoing weakness in the private sector. As households continue to face a weakening labor market paired with tightening credit conditions, the European Central Bank is widely expected to maintain its current policy throughout the first-half of the year, and the Governing Council may hold a dovish outlook going into the second-half of the 2010 as President Trichet expects to see an uneven recovery this year. EUR/USD


January 2010 German Unemployment Change

Unemployment in Germany increased 6K in January amid forecasts for a 15K rise, which pushed the jobless rate to 8.2% from 8.1% in the previous month. Going forward, the deterioration in the labor market paired with tightening credit conditions are likely to dampen private sector spending, and the European Central Bank may keep borrowing costs at the record-low  of 1.00% throughout the first-half of 2010 as policy makers aim to balance the risks for growth and inflation. At the same time, ECB council member Axel Weber stated that “as the economy improves, we’ll take some of the exceptional measures bank,” but we may see the central bank maintain a dovish outlook for future policy as they maintain their one and only mandate to ensure price stability. eurusd03.30b

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:
00001_EUR
Bearish Scenario:
00002_EUR


How To Trade This Event Risk

The German labor market is expected to weaken further in March as economists forecast unemployment to increase 7K for the second consecutive month, and the data could weigh on the exchange rate as European policy makers continue to see a risk for a protracted recovery. The final 4Q GDP report showed the economy failed to grow during the last three-months of 2009, led by a 1.0% drop in private consumption paired with a 0.7% decline in capital investments, and the ongoing deterioration in the labor market may lead households to keep a lid on spending throughout the first-half of the year. Bundesbank President Axel Weber said that the “the first quarter could be a sideways move,” and argued that the growth rate “could even be negative due to the exceptional winter conditions” during a speech in Copenhagen. At the same time, Mr. Weber said that the “economy is unlikely to replicate the growth profile” before the recession as “exports were boosted by strong, but ultimately unsustainable, global economy growth,” and went onto say that “German enterprises will naturally have to focus more on the domestic market than before” as policy makers aim to encourage a sustainable recovery.

Nevertheless, the Bundesbank said that the economic recovery will gather momentum in the second quarter, “given strongly improved demand in manufacturing at the beginning of the year and expected catch-up effects in construction,” and noted that it expects “relatively robust consumption” in its monthly report release earlier this month. Meanwhile, the European Central Bank held borrowing costs at the record-low in March and reiterated that “the current rates remain appropriate,” but expects to see an “uneven” recovery this year as “upward and downward” risks remain for the economy. Moreover, the Governing Council maintained a dovish outlook for the region and expects price pressures to stay subdued “over the policy-relevant horizon,” and went onto say “inflation expectations remain firmly anchored” as the board maintains its one and only mandate to ensure price stability. As a result, the ECB is widely expected to maintain its current policy stance going into the second-half of the year, and may keep the benchmark interest rate on hold in the third-quarter as the central bank aims to balance the risks for the economy.

Expectations for a drop in German payrolls could weigh on the exchange rate as investors weigh the prospects for future growth but nevertheless, price action following an enhanced labor report could set the stage for a long euro trade. Therefore, if unemployment holds flat or unexpectedly falls in March, we will need to see a green, five-minute candle following the release to establish a buy entry on two-lots of EUR/USD. Once these conditions are fulfilled, we will place the initial stop at the nearby swing low or a reasonable distance, 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 breakeven once the first trade reaches its mark in an effort to lock-in our profits.

In contrast, fears of a protracted recovery may lead businesses to expand their cost cutting measures, and a drop in German employment could weigh on the exchange rate as policy makers maintain a cautious outlook for the region. As a result, if the labor market sheds 7K or more jobs from the previous month, we will favor a bearish outlook for the single-currency, and will follow the same setup for a short euro-dollar trade as the long position laid above, just in reverse.

eurusd03.30c
 


Written by David Song, Currency Analyst
Questions? Comments? Email me at instructor@dailyfx.com

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