EUR/USD: Trading the U.S. Preliminary 1Q GDP Report
Trading the News: U.S. Preliminary 1Q GDP
Why Is This Event Important:
An upward revision in the growth rate would reinforce an improved outlook for the world’s largest economy as it emerges from the worst recession since the Great Depression, and the data could lead the Federal Reserve to raise its assessment for future growth as the recovery gathers pace. However, as the central bank expects the ongoing weakness in the private sector to drag on growth and inflation over the coming months, a dismal GDP report could weigh in interest rate expectations as the FOMC pledges to hold the interest rate close to zero for an “extended period” of time.
Time of release: 05/27/2010 12:30 GMT, 8:30 EST
Primary Pair Impact : EURUSD
Will This Be Market Moving (Scenarios):
Economic activity in the U.S. is expected to expand 3.4% in the first-quarter amid an initial forecasts for a 3.2% rise in the growth rate, while personal consumption is anticipated to increase 3.8% during the first three-months of the year, which would be the highest reading since the fourth-quarter of 2006. As private-sector spending accounts for more than two-thirds of the economy, the faster pace of expansion in the growth rate paired with the improvement in consumption could stoke speculation for a rate hike later this year as the Fed looks to normalize policy this year. However, as the U.S. dollar remains the most popular safe-haven currency next to the Japanese Yen and the Swiss franc, a shift in market sentiment could stoke mixed price action a risk trends continue to dictate price action in the currency market.
As household sentiment improves, with businesses increasing their rate of production, the extraordinary steps take on by the government could lead to a better-than-expected 1Q GDP report as the expansion in monetary and fiscal policy continues to feed through the real economy. With the economic recovery picking up pace, the Fed may see scope to increase borrowing costs later this year, which could drive the dollar higher as investors weigh the prospects for future policy.
However, as the central bank expects the slack within the economy to remain “elevated for some time” given the deterioration in the labor market, economic activity may track below expectations as households and businesses continue to face tightening credit conditions. As a result, a dismal growth rate could lead the Fed to maintain a loose policy stance throughout the second-half of the year, which would weigh on the exchange rate as investors scale back expectations for a rate hike.
How To Trade This Event Risk
Expectations for an upward revision in the growth rate favors a bullish outlook for the greenback, and price action following the report could pave the way for a long dollar trade as the prospects for a sustainable recovery improve. Therefore, if GDP expands 3.4% or greater in the first-quarter, we will need to see a red, five-minute candle following the release to establish a sell entry on two lots of EUR/USD. Once these conditions are fulfilled, we will set the initial stop at the nearby swing high or a reasonable distance depending on market volatility, 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 an effort to lock-in our profits.
On the other hand, the ongoing weakness in the private sector could lead to a dismal GDP report, and an unexpected downward revision in the growth rate could drag on the greenback as investors weigh the outlook for future growth. As a result, if the economy expands 3.0% or less in the first-quarter, we will favor a bearish outlook for the reserve-currency, and will follow the same strategy for a long euro-dollar trade as the long position laid out above, just in reverse.
Impact U.S. GDP has had on USD during the previous quarter
4Q 2009 U.S. Preliminary GDP
|Economic activity in the world’s largest economy expanded at an annualized pace of 5.9% in the fourth quarter amid an initial projection for a 5.7% rise in the growth rate, led by a rise in business investments, while personal consumption advanced 1.7% amid expectations for a 2.0% increase. The breakdown of the report showed gross private investments jumped 48.9% after rising 0.5% in the third-quarter, with exports increase 22.4%, while government consumption weakened for the second quarter in 2009. As the rebound in economic activity gathers pace, policy makers are likely to raise their economic assessment as the prospects for future growth improves. However, as the Federal Reserve expects the ongoing slack within the real economy to drag on price pressures over the coming months, Chairman Bernanke may hold a dovish bias going forward as he aims to balance the risks for growth and inflation.|
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:
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.
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.
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To discuss this report contact David Song, Currency Analyst: email@example.com
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