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EUR/USD: Trading the German IFO Business Confidence Survey

EUR/USD: Trading the German IFO Business Confidence Survey

2011-03-24 19:36:00
David Song, Currency Strategist
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Trading the News: German IFO Survey (Expectations)

What’s Expected:

Time of release: 03/25/2011 9:00 GMT, 5:00 EST

Primary Pair Impact:EURUSD

Expected: 106.8

Previous: 107.9

DailyFX Forecast: 106.0 to 107.3

Why Is This Event Important:

The German IFO business confidence survey is anticipated to fall back from a record-high in March, with market participants forecasting the gauge for future expectations to weaken to 106.8 from 107.9 in the previous month, and the drop in sentiment could bear down on the exchange rate as the prospects for future growth deteriorate. As the slew of natural disasters in the Asia/Pacific region dampens the outlook for global trade, the uncertainties surrounding the world economy may push firms to scale back on production, and business confidence may weaken further throughout the first-half of the year as the region copes with an uneven recovery. However, as the EU Summit takes center stage, currency traders may show a muted reaction to the IFO survey, and the EUR/USD may consolidate going into the end of the week as European policy makers weigh alternative measures to address the sovereign debt crisis.

Recent Economic Developments

The Upside

Release

Expected

Actual

PMI Services (MAR A)

58.4

60.1

Factory Orders (JAN)

2.5%

2.9%

Retail Sales (JAN)

0.5%

1.4%

The Downside

Release

Expected

Actual

PMI Manufacturing (MAR A)

62.0

60.9

Trade Balance (JAN)

13.0B

10.1B

Capital Investment (4Q)

2.0%

-1.1%

The ongoing expansion in service-based activity paired with the rebound in domestic demands could spark a rise in business sentiment, and firms may hold an improved outlook for future growth as the recovery in Europe gradually gathers pace. However, as the expansion in global trade cools, with firms scaling back on investments, the recent developments suggest businesses are becoming less optimistic towards the economy as the fundamental outlook remains clouded with high uncertainty. As the governments operating under the fixed exchange rate system take unprecedented steps to manage their public finances, the tough austerity measures is likely to bear down on economic activity, and business confidence may deteriorate further over the coming months as the region copes with an uneven recovery.

Potential Price Targets For The Release

EURUSD_Trading_the_German_IFO_Business_Confidence_Survey_body_ScreenShot018.png, EUR/USD: Trading the German IFO Business Confidence Survey

How To Trade This Event Risk

Expectations for a drop in the IFO survey certainly reinforces a bearish outlook for the single-currency, but another unexpected rise in business confidence could pave the way for a long euro trade as growth prospects improve. As a result, if the gauge for future expectations increases from the previous month, we will need to see a green, five-minute candle following the release to establish a buy entry on two-lots of EUR/USD. Once these conditions are met, we will set the initial stop at the nearby swing low or a reasonable distance from the entry, 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 an effort to protect our profits.

In contrast, business optimism may deteriorate in March as the region copes with an uneven recovery, and the slowdown in global trade may lead firms in Germany to scale back their outlook for future growth given the ongoing weakness within the private sector. Therefore, if the survey falls back to 106.8 or lower from the previous month, we will carry out the same strategy for a short euro-dollar trade as the long position laid out above, just in reverse.

Impact that the German IFO Business Confidence survey has had on EUR during the last month

Period

Data Released

Estimate

Actual

Pips Change

(1 Hour post event )

Pips Change

(End of Day post event)

Feb 2011

2/21/2011 9:00 GMT

107.5

107.9

-30

-19

February 2011 German IFO Survey (Expectations)

Business confidence in Germany unexpectedly hit a record-high in February as the IFO survey advanced to 111.2 from 110.3 in the previous month, while the gauge for future expectations increased to 107.9 from 107.8 during the same period to mark the highest reading since the series began in 1991. The ongoing improvement in business sentiment encourages an enhanced outlook for the euro-area as Germany, the region’s largest economy, leads the recovery, and firms may increase their rate of production throughout the first-half of the year as the nation benefits from the expansion in global trade. As growth and inflation gathers pace, the European Central Bank may see scope to reestablish its exit strategy in 2011, and the Governing Council could show an increased willingness to lift the benchmark interest rate off the record-low in order to keep inflation expectations firmly anchored. Indeed, the EUR/USD pushed above 1.3700 immediately following the release, but the market reaction was short-lived as the pair ended the day at 1.3675.

EURUSD_Trading_the_German_IFO_Business_Confidence_Survey_body_ScreenShot017.png, EUR/USD: Trading the German IFO Business Confidence Survey

Questions? Comments? Join us in the DailyFX Forum

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

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

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

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