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EUR/USD: Trading the U.S. Durable Goods Orders Report

EUR/USD: Trading the U.S. Durable Goods Orders Report

2011-02-22 19:32:00
David Song, Currency Strategist
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Trading the News: U.S. Durable Goods Orders

What’s Expected:

Time of release: 02/24/201113:30 GMT, 8:30 EST

Primary Pair Impact: EURUSD

Expected: 3.0%

Previous: -2.5%

DailyFX Forecast: 1.0% to 3.0%

Why Is This Event Important:

Orders for U.S. durable goods are expected to increase 3.0% in January after unexpectedly contracting 2.5% in the previous month, and the rebound in domestic demands could spark a bullish reaction in the U.S. dollar as the economic recovery gathers pace. However, as market participants anticipate demands for non-defense capital goods excluding aircrafts, which acts as a proxy for business investment, to contract 1.0% from the month prior, the mixed batch of data could spark choppy price action in the currency market as investors weigh the prospects for a sustainable recovery. Nevertheless, as the Fed turns increasingly optimistic towards the economy and sees the recovery on a “firmer footing,” the central bank may show an greater willingness to withdraw monetary stimulus later this year as the outlook for growth and inflation improves.

Recent Economic Developments

The Upside

Release

Expected

Actual

Consumer Confidence (FEB)

65.5

70.4

Consumer Credit (DEC)

$2.400B

$6.009B

Personal Spending (DEC)

0.5%

0.7%

The Downside

Release

Expected

Actual

Advance Retail Sales (JAN)

0.5%

0.3%

Non-Farm Payrolls (JAN)

146K

36K

Construction Spending (MoM) (DEC)

0.1%

-2.5%

As household confidence advances to a three-year high in February, with consumer credit expanding for the third consecutive month in December, the rise in private sector activity is likely to gather pace going forward as U.S. policy makers take extraordinary steps to aid the economic recovery. However, as building activity remains subdued, with the rise in retail spending tapering off, the durable goods orders report may fail to meet market expectations given the ongoing slack within the private sector. In turn, the Fed may look to support the real economy throughout 2011 and the central bank may see scope to ease monetary policy further this year as it aims to balance the risks for the region.

Potential Price Targets For The Release

EURUSD_Trading_the_U.S._Durable_Goods_Orders_Report_body_ScreenShot039.png, EUR/USD: Trading the U.S. Durable Goods Orders Report

How To Trade This Event Risk

Expectations for a rebound in durable goods orders certainly reinforce a bullish outlook for the greenback, and the market reaction following the release could pave the way for a long U.S. dollar trade as the economic recovery gathers pace. Therefore, if demands increase 3.0% or greater in January, we will need a red, five-minute candle subsequent to the data to establish a sell entry on two-lots of EUR/USD. Once these conditions are fulfilled, we will place the initial stop at the nearby swing high 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 protect our profits.

In contrast, the ongoing weakness within the private sector paired with the depressed housing market could weigh on domestic demands, and a dismal durable goods report could spark a selloff in the greenback as growth prospects deteriorate. As a result, if orders rise less than 1.0% or unexpectedly contract from the previous month, we will carry out the same setup for a long euro-dollar trade as the short position laid out above, just in the opposite direction.

Impact that Orders for U.S. Durable Goods 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)

Dec 2010

01/27/2011 13:30 GMT

1.5%

-2.5%

+23

+17

December 2010 U.S. Durable Goods Orders

Demands for U.S. durable goods unexpectedly weakened 2.5% in December following a 0.1% contraction in the previous month, while orders for non-defense capital goods excluding aircrafts, a gauge for business spending, increased 1.4% amid forecasts for a 1.3% rise. A deeper look at the report showed demands for transportation equipment weakened another 12.8% following the 13.1% decline in November, while orders for machinery increased 10.6% after climbing 0.3% in the month prior. As growth prospects improve, the Federal Reserve is likely to raise its fundamental assessment for the world’s largest economy, and the central bank may curb speculation for another round of quantitative easing as the recovery gathers pace. Indeed, the U.S. dollar quickly lost ground as the headline reading crossed the wires much weaker-than-expected, with the EUR/USD advancing to a daily high of 1.3757, but the sharp rally tapered off during the North American trade as the exchange rate ended the day at 1.3733.

EURUSD_Trading_the_U.S._Durable_Goods_Orders_Report_body_ScreenShot038.png, EUR/USD: Trading the U.S. Durable Goods Orders Report

Questions? Comments? Join us in the DailyFX Forum

Join Quantitative Strategist David Rodriguez in the DailyFX Live Trading Room To Cover the Event LIVE!

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

To Give Feedback on the New Layout, Please Send Your Comments or Recommendations to David Song, Currency Analyst: dsong@dailyfx.com

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