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EUR/USD: Trading the U. of Michigan Confidence Survey

EUR/USD: Trading the U. of Michigan Confidence Survey

2011-02-09 20:27:00
David Song, Currency Strategist
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Trading the News: U. of Michigan Confidence

Why Is This Event Important:

As market participants expect to see a rebound in household sentiment, a rise in the U. of Michigan confidence survey could lead the U.S. dollar to recoup the losses from earlier this week as the outlook for growth and inflation improves. However, as labor growth subdued, with households coping with higher energy costs, we may see another unexpected decline in household confidence as the central bank maintains a cautious outlook for the real economy.

What’s Expected:

Time of release: 02/11/2011 14:55 GMT, 9:55 EST

Primary Pair Impact:EURUSD

Expected: 75.0

Previous: 74.2

DailyFX Forecast: 73.0 to 76.0

Will This Be Market Moving (Scenarios):

The U. of Michigan consumer confidence survey is forecasted to increase to 75.0 in February from 74.2 in the previous month, and the data is likely to reinforce an improved outlook for the real economy as private sector spending remains one of the leading drivers of growth. In turn, the recent developments may encourage the Fed to raise its economic projections for the region, and the central bank may show an increased willingness to start normalizing monetary policy later this year as the recovery gradually gather paces.

The Upside

As personal spending expands at a faster pace in December, with retail sales increasing throughout the second-half of 2010, the recent developments suggest households are becoming increasingly upbeat towards the economy as the government takes extraordinary steps to stimulate growth and inflation. In turn, currency traders may show a bullish reaction to a rise in household confidence, and the EUR/USD may retrace the advance from earlier this year as growth prospects for the world’s largest economy improves.

The Downside

However, as households cope with a depressed housing market paired with the protracted recovery in employment, the ongoing weakness within the private sector may bear down on consumer confidence as the Fed continues to cast doubts for a sustainable recovery. Accordingly, another unexpected drop in the U. of Michigan survey could fuel the bearish sentiment underlying the greenback, and the EUR/USD may retrace the decline from the previous week as investors speculate the Fed to expand quantitative easing further this year.

How To Trade This Event Risk

Expectations for a rebound in household sentiment reinforces a bullish outlook for the greenback, and market reaction to the data could set the stage for a long U.S. dollar trade as growth prospects improve. Therefore, if the U. of Michigan survey advances to 75.0 or higher in February, we will need to see a red, five-minute candle following the release to generate a sell entry on two-lots of EUR/USD. Once these conditions are met, we will set the initial stop at the nearby swing high or a reasonable distance from the entry, and this risk will establish 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 target in order to lock-in our profits.

On the other hand, households confidence may weaken further given the ongoing weakness within the private sector, and consumer sentiment may deteriorate over the coming months as the Fed maintains a cautious outlook for the real economy. As a result, if the survey weakens to 73.0 or lower from the previous month, we will carry out the same strategy for a long euro-dollar trade as the short position mentioned above, just in reverse.

Potential Price Targets For The Release

EURUSD_Trading_the_U._of_Michigan_Confidence_Survey_body_ScreenShot006.png, EUR/USD: Trading the U. of Michigan Confidence Survey

Impact that U. of Michigan confidence survey has had on USD during the last month

Period

Data Released

Estimate

Actual

Pips Change

(1 Hour post event )

Pips Change

(End of Day post event)

Jan 2011

01/14/2011 14:55 GMT

75.5

72.7

+15

+27

January 2011 U. of Michigan Confidence Survey

Consumer sentiment in the world’s largest economy unexpectedly weakened in January, with the U. of Michigan confidence survey slipping to two-month low of 72.7 from 74.5 in the previous month, and the data reinforces a weakened outlook for the region as private sector consumption remains one of the leading drivers of growth. As households cope with higher energy costs paired with the tepid recovery in the labor market, consumer confidence may deteriorate further over the coming months as the Federal Reserve maintains a weakened outlook for growth and inflation. In turn, the central bank may look to support the real economy throughout the first-half of 2011, and the Fed may see scope to expand monetary policy further as it aims to encourage a sustainable recovery. The EUR/USD pushed higher following the dismal confidence report, with the exchange rate spiking to a high of 1.3402, but the sharp rally certainly tapered off as the euro-dollar ended the day at 1.3373.

EURUSD_Trading_the_U._of_Michigan_Confidence_Survey_body_ScreenShot005.png, EUR/USD: Trading the U. of Michigan Confidence Survey

Questions? Comments? Join us in the DailyFX Forum

Join Currency Analyst Michael Wright in the DailyFX Trading Room to cover the event LIVE!

View the Expo Presentation on ‘Trading the News’ For Additional Resources

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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