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EUR/USD: Trading the Advanced U.S. 2Q GDP Report

EUR/USD: Trading the Advanced U.S. 2Q GDP Report

2010-07-29 17:20:00
David Song, Currency Strategist
Share:

Why Is This Event Important:

However, as market sentiment continues to dictate price action in the currency market, a dismal growth reading could spark a rise in risk aversion as the economic recovery wanes.

What’s Expected:

Time of release: 07/30/2010 12:30 GMT, 8:30 EST

Primary Pair Impact: EURUSD

Expected: 2.5%

Previous: 2.7%

Will This Be Market Moving (Scenarios):

The advanced 2Q GDP report is expected to show the U.S. economy expanding at an annualized pace of 2.5% following the 2.7% rise in the first-three months of the year, while personal consumption is forecasted to increase 2.4% after advancing 3.1% in the first-quarter. As the government stimulus tapers off, with households continuing to face tightening credit conditions paired with the deterioration in the labor market, the Fed may keep borrowing costs close to zero going into 2011 as Chairman Ben Bernanke expects to see “moderate growth” going forward.

The Upside

As business benefit from the rebound in global trade and increase their rate of production, the rise in U.S. outputs could produce a larger-than-expected rise in the growth rate, and an enhanced GDP report could lead the central bank to raise its economic assessment as the recovery gathers pace. As a result, the Fed may drop its pledge to hold the benchmark interest rate at the record-low for an “extended period” of time and see scope to normalize policy further going into the end of 2010 as the outlook for future growth improves.

The Downside

However, tightening credit conditions paired with the ongoing weakness in the labor market has certainly dragged on household spending, which accounts for more than two-thirds of the economy, and the slack within the private sector could lead to a dismal growth report, which would weigh on the exchange rate as investors mull over the prospects for a sustainable recovery. Accordingly, the Fed may hold a cautious outlook for the economy and keep the interest rate at the record-low well into 2011 in an effort to stem the downside risks for growth and inflation.

How To Trade This Event Risk

Trading the given event risk may not be as clear cut as some of our previous trades but nevertheless, an enhanced GDP report could set the stage for a long dollar trade as the fundamental outlook improves. Therefore, if the growth rate expands at an annualized pace of 2.7% or greater in the second-quarter, we will need a red, five-minute candle following the release to generate 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 after taking market volatility into account, 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.

In contrast, the substantial margin of slack within in the real economy paired with the weakness in the financial system could foster a dismal growth reading, and fears of a protracted recovery could drag on the exchange rate as investors weigh the fundamental outlook for the world’s largest economy. As a result, if GDP expands 2.5% or less, 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.

Sustainable Recovery Ahead - Stronger Than ExpectationsGrowth Outlook Falters Lower Than Expectations

2Q GDP disappoints, pushing the Fed to support the real economy into the following year.

An enhanced GDP report could lead the Fed to ramp up is economic assessment as the recovery gathers pace.

TTN-10-07-29_body_ScreenShot002.png, EUR/USD: Trading the Advanced U.S. 2Q GDP ReportTTN-10-07-29_body_ScreenShot002_1.png, EUR/USD: Trading the Advanced U.S. 2Q GDP Report

Impact U.S. 1Q GDP had on USD during the previous quarter

Period

Data Released

Estimate

Actual

Pips Change

(1 Hour post event )

Pips Change

(End of Day post event)

1Q 2010

04/30/2010 12:30 GMT

3.3%

3.2%

+34

+9

1Q 2010 U.S. GDP

The world’s largest economy expanded at an annualized pace of 3.2% in the first quarter, which was just shy of expectations for a 3.3% rise in the growth rate, while personal consumption jumped 3.6% during the first three-months of the year to exceed forecasts for a 3.3% advance. The data encourages an improved outlook for future growth as private spending remains one of the leading drivers of growth, and conditions are likely to pick up further over the coming months as the government stimulus continues to feed into the real economy, As a result, the central bank may see scope to normalize monetary policy further in the second-half of the year as the recovery gathers pace. However, as Fed Chairman Ben Bernanke maintains his pledge to keep borrowing costs close to zero for an “extended” period of time and expects price growth to remain subdued over the medium-term, the FOMC may hold a dovish bias going forward in an effort to stem the downside risks for the economy.

Bearish dollar price action following the release would have pushed us to the sidelines.

TTN-10-07-29_body_ScreenShot001.png, EUR/USD: Trading the Advanced U.S. 2Q GDP Report

What To Look For Before The Release

Traders with access to market depth information via the FXCM ActiveTrader 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.

TTN-10-07-29_body_AT_bull_1.png, EUR/USD: Trading the Advanced U.S. 2Q GDP ReportTTN-10-07-29_body_AT_bear_1.png, EUR/USD: Trading the Advanced U.S. 2Q GDP Report

Questions? Comments? Join us in the DailyFX Forum

To discuss this report contact David Song, Currency Analyst: dsong@fxcm.com

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

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