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EUR/USD: Trading the U.S. Personal Spending Report

EUR/USD: Trading the U.S. Personal Spending Report

2010-05-27 19:10:00
David Song, Currency Strategist
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Trading the News: U.S. Personal Spending

Why Is This Event Important:

A higher rate of private consumption would reinforce an improved outlook for the world’s largest economy as it remains one of the leading drivers of growth, and a seventh consecutive monthly rise in household spending could drive the U.S. dollar higher as the rebound in economic activity gathers momentum. However, the ongoing weakness in labor market paired with tightening credit conditions could spur a tepid recovery, and a dismal spending report would allow the Federal Reserve to maintain a loose policy stance in the second-half of the year as the central bank aims to balance the risks for growth and inflation.

What’s Expected:
Time of release:        05/28/2010 12:30 GMT, 8:30 EST
Primary Pair Impact :    EURUSD
Expected:         0.3%
Previous:         0.6%

Will This Be Market Moving (Scenarios):

Personal spending is expected to increase 0.3% in April following the 0.6% expansion in the previous month, while household incomes are forecasted to widen 0.4% during the same period after rising 0.3% in February, and conditions are likely to improve going forward as the government continues to support the real economy. As growth prospects improve, the Fed may look to raise its assessment for future growth and see scope for a rate hike later this year as the OECD encourages the central bank to unwind monetary stimulus further in the second-half of 2010.

The Upside

As policy makers see the labor market beginning to improve, with household sentiment rising to a two-year high, the rebound in economic activity may lead consumers to increase their willingness to spend as the nation emerges from the worst recession since the Great Depression. As a result, a larger-than-expected rise in consumption could fuel interest rate expected and lead to a bullish reaction in the greenback as the fundamental outlook picks up.

The Downside

However, the smaller-than-expected expansion in the first-quarter growth rate suggests households remain reluctant to spending as they face limited demands for employment paired with tightening borrowing standards, and the cautious outlook held by policy makers could lead consumers to keep a lid on spending and increase their temperament to save. In turn, the ongoing slack within the economy could lead Chairman Bernanke to maintain his pledge to keep borrowing costs at the record-low in the second-half of the year, which would drag on the exchange rate as investors weigh the prospects for future policy.

How To Trade This Event Risk

Trading the given event risk favors a bullish outlook for the greenback as growth prospects improve, and market reaction following the release could set the stage for a long dollar trade as the recovery gathers pace. Therefore, if personal spending increases 0.3% or greater in April, we will need to see a red, five-minute candle following the release to confirm a sell entry on two-lots of EUR/USD. Once these conditions are met, we will place the initial stop at the nearby swing high 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 cost once the first trade reaches its mark in order to preserve our profits.

In contrast, the deterioration in the labor market paired with tightening credit conditions could weigh on household’s sentiment to spending, and a weaker-than-expected consumption report could drag on the exchange rate as the prospects for a sustainable recovery wanes. As a result, if spending grows less than 0.2% or unexpectedly contracts from the previous month, we will favor a bearish outlook for the greenback, and will implement the same strategy for a long euro-dollar trade as the short position laid out above, just in reverse.

05.27_TTN1

Impact U.S. Personal Spending has had on USD during the previous month

05.27_TTN2

March 2010 U.S. Personal Spending

Household spending in the U.S. increased 0.6% in March to mark the fastest pace of growth in five months, while personal income expanded 0.3% during the same period after rising a revised 0.1% in February, and conditions are likely to improve going forward as the government continues to support the real economy. The breakdown of the report showed demands for durable goods advanced 3.4% after being adjusted for inflation , which marked the biggest rise since August, while spending for services were little changed during the month after increasing 0.4% in February. However, as the labor market remains weak, the Federal Reserve reiterated its pledge to keep borrowing costs close to zero in an effort to encourage a sustainable recovery, and Chairman Bernanke is likely to hold a dovish outlook for future policy as businesses remain reluctant to expand their labor force. 05.27_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

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

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