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EUR/USD: Trading the Euro-Zone Advanced 1Q GDP Report

EUR/USD: Trading the Euro-Zone Advanced 1Q GDP Report

2010-05-10 19:54:00
David Song, Currency Strategist
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Trading the News: Euro-Zone 1Q Gross Domestic Product

Why Is This Event Important:

As European policy makers expect to see an uneven recovery this year, the advanced 1Q GDP report for the euro-region is likely to stoke increased volatility in the exchange rate as investors weigh the outlook for future growth. At the same time, government officials and the International Monetary Fund have pledged an unprecedented EUR 750B to help the ailing economies operating under the fixed-exchange rate system to deal with the turmoil in public finances, and the European Central Bank may look to maintain a loose policy stance throughout the second-half of the year as the economic rebound in the region lags behind the rest of the industrialized economies.

What’s Expected:
Time of Release:        05/12/2010 09:00 GMT, 5:00 EST
Primary Pair Impact :    EURUSD
Expected:         0.1%
Previous:         0.0%

Will This Be Market Moving (Scenarios):

Economic activity in the Euro-Zone is expected to expand 0.1% in the first-quarter after holding flat during the last three-month period, and the data is likely to encourage an improved outlook for the region as policy makers aim to encourage a sustainable recovery. However, European Central Bank President Jean-Claude Trichet reiterated that the recovery is likely to be “uneven” following the interest rate decision earlier this month even though there has been “some news that were better than expected over the recent period of time,” and went onto say that the growth reading for “the first quarter would ne be flattering at all.” As a result, the central bank head said he remains “prudent and cautious” as the rebound in economic activity is inconsistent throughout the region, and argued that the interest rate remains “appropriate” as the Governing Council seeks to balance the risks for growth and inflation.

The Upside

As the rebound in global growth paired with the rise in business outputs gathers pace, GDP in the Euro-Zone could top market expectations, which could lead the euro to appreciate against its currency counterparts as the expansion in government policy continues to feed through the real economy. Moreover, Mr. Trichet said that “global growth is more than confirmed” during a press conference at the Bank of International Settlements in Switzerland, and went onto say that there were “a number of cases” where growth was better than initially expected.

The Downside


However, as market participants expect economic activity in Germany to hold flat for the second consecutive quarter, the protracted recovery in Europe’s largest economy could hamper the prospects for future growth and spark increased selling pressures on the euro. In addition, a dismal growth report would certainly allow the central bank to hold a loose policy stance in the second-half of 2010, which would weigh expectations for a rate hike later this year.

How To Trade This Event Risk


Expectations for a rise in first-quarter GDP favors a bullish outlook for the single-currency, and price action following the release could set the stage for a long euro trade as the outlook for growth improves. Therefore, if the growth rate expands 0.1% or greater from the previous three-month period, we will need a green, five-minute candle subsequent to the data to establish 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 after taking market volatility into account, 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 cost once the first trade reaches its mark in order to preserve our profits.

On the other hand, the ongoing weakness in private sector spending paired with the deterioration in the labor market could lead to a dismal growth report, and a lower-than-expected GDP reading could weigh on the exchange rate as policy makers see a risk for a protracted recovery. As a result, if GDP holds flat or unexpectedly contracts in the first-quarter, we will favor a bearish outlook for the single-currency, and will implement the same setup for a short euro-dollar trade as the long position mentioned above, just in reverse.

05.10_TTN1

Impact that the Euro-Zone GDP has had on EUR during the previous quarter

05.10_TTN2

2009 Euro-Zone 4Q Gross Domestic Product

The advanced 4Q GDP report showed economic activity in the Euro-Zone expanded 0.1% during the last three-months of 2009, which fell short of expectations for a 0.3% rise, and policy makers may hold a loose policy stance throughout the first-half of the year as they aim to encourage a sustainable recovery. At the same time, Germany failed to expand during the same period, with Spain contracting for seven consecutive quarters, while France expanded 0.6% to taper the downturn in the region. As households continue to face fading demands for employment paired with tightening credit conditions, the ongoing weakness in the private sector could hamper the prospects for future growth as the European Central Bank expects to see an “uneven” recovery this year. 05.10_TTN3

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 EUR 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 EUR 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

Questions? Comments? Join us in the DailyFX Forum

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

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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