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

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

2011-05-24 19:54:00
David Song, Currency Strategist
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Trading the News: U.S. Durable Goods Orders

What’s Expected:

Time of release: 05/25/2011 12:30 GMT, 8:30 EST

Primary Pair Impact: EURUSD

Expected: -2.5%

Previous: 2.5%

DailyFX Forecast: -0.5% to 1.0%

Why Is This Event Important:

Orders for U.S. durable goods are expected to contract 2.5% in April and the decline in private sector consumption is likely to spur a bearish reaction in the greenback as the outlook for future growth deteriorates. However, as there appears to be a major shift in risk-taking behavior, a dismal release could bear down on market sentiment, leading to a bullish dollar reaction as it benefits from safe-haven flows. Nevertheless, the ongoing weakness in the real economy may lead the Federal Reserve to carry out a zero interest rate policy for most of 2011, and Chairman Ben Bernanke may continue to talk down speculation for a rate hike this year in an effort to stimulate a sustainable recovery.

Recent Economic Developments

The Upside

Release

Expected

Actual

U. of Michigan Confidence (MAY P)

70.0

72.4

Domestic Vehicle Sales (APR)

9.90M

10.20M

Personal Income (MAR)

0.4%

0.5%

The Downside

Release

Expected

Actual

Consumer Price Index (YoY) (APR)

3.1%

3.2%

Advance Retail Sales (APR)

0.6%

0.5%

GDP (QoQ) (Annualized) (1Q A)

2.0%

1.8%

The rebound in household sentiment paired with the faster pace of wage growth should help to spur a rise in consumption, and the Fed may raise its economic assessment as growth and inflation gathers pace. However, as Americanface higher energy costs, households and businesses may curb their willingness to spending, and the ongoing weakness in the private sector may lead the central bank to support the real economy throughout the second-half of the year as it aims to balance the downside risks for the region. Although the Fed plans to conclude its easing cycle in June, the committee may retain a wait-and-see approach for the remainder of the year, and dovish comments from the Mr. Bernanke is likely to bear down on the exchange rate as interest rate expectations falter.

Potential Price Targets For The Release

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

How To Trade This Event Risk

Trading the given event risk reinforces a bearish outlook for the reserve currency as private sector consumption falters, but an enhanced durable goods report could set the stage for a long U.S. dollar trade as growth prospects improve. As a result, fall less than 1.0% or unexpectedly expand from the previous month, we will need a red, five-minute candle subsequent to the release to generate a sell entry on two-lots of EUR/USD. Once these precondition 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 cost once the first trade reaches its mark in an effort to lock-in our winnings.

In contrast, household and businesses may scale back on purchases of large-ticket items, and a dismal report is likely to instill a weakened outlook for the world’s largest economy as the Fed looks to retain its zero interest rate policy. Therefore, if orders weaken 2.5% or more in April, we will carry out the same strategy for long euro-dollar trade as the short position laid out above, just in the opposite direction.

Impact that the U.S. Durable Goods Orders report 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)

Mar 2011

04/27/2011 12:30 GMT

2.3%

2.5%

+11

+125

March 2011 U.S. Durable Goods Orders

Demands for U.S. durable goods increased 2.5% in March after contracting a revised 1.1% in the previous month, and the data encourages an improved outlook for the world’s largest economy as private sector consumption remains one of the leading drivers of growth. The breakdown of the report orders for non-defense capital goods excluding aircrafts, which acts as a proxy for future business investments, increased 3.7% following a 0.5% expansion in March, while inventories rose 1.3% for the second consecutive month in March. Despite the larger-than-expected rise, currency traders showed little reaction to the data, with the EUR/USD maintain the narrow range ahead of the release, but the exchange rate rallied to a high of 1.4794 following the FOMC rate decision as Chairman Ben Bernanke held a cautious outlook for the economy. However, as the FOMC plans to conclude its exit strategy in June, there could be a major shift in risk-taking behavior, and the central bank may see scope to start normalizing monetary policy later this year as growth and inflation improves.

EURUSD__Trading_the_U.S._Durable_Goods_Orders_Report_body_ScreenShot037.png, EUR/USD:  Trading the U.S. Durable Goods Orders Report

Questions? Comments? Join us in the DailyFX Forum

Join Currency Analyst Michael Boutros 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: dsong@dailyfx.com

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