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

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

2011-09-15 19:00:00
David Song, Currency Strategist
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Trading the News: U. of Michigan Confidence Survey

What’s Expected:

Time of release: 09/16/2011 13:55GMT, 9:55 EST

Primary Pair Impact: EURUSD

Expected: 56.9

Previous: 55.7

DailyFX Forecast: 54.0 to 58.0

Why Is This Event Important:

A rebound in U.S. household sentiment should reinforce an improved outlook for private sector consumption, and an uptick in the U. of Michigan confidence survey could spur a bullish reaction in the dollar as it raises the prospects for future growth. In turn, the Federal Reserve may look to revise its fundamental assessment for the world’s largest economy, and we may see the FOMC preserve a wait-and-see approach for monetary policy as the central bank expects economic activity to gather pace over the remainder of the year.

However, the committee may employ additional tools to stimulate the ailing economy and the Fed may continue to reiterate its pledge to carry the zero interest rate policy well into 2013 in an effort to stem the risk for a double-dip recession. With risk trends heavily influencing price action in the currency market, the reaction may be highly dependent on trader sentiment, and a positive development could weigh on the greenback as investors increase their appetite for yields.

Recent Economic Developments

The Upside

Release

Expected

Actual

Consumer Credit (JUL)

$6.000B

$11.965B

ISM Non-Manufacturing (AUG)

51.0

53.3

Durable Goods Orders (JUL)

2.0%

4.0%

The Downside

Release

Expected

Actual

Average Hourly Earnings (AUG)

0.2%

-0.1%

Change in Non-Farm Payrolls (AUG)

68K

0K

Gross Domestic Product (QoQ) (2Q S)

1.1%

1.0%

The ongoing expansion in consumer credit paired with the rise in service-based activity could foreshadow a mild improvement in household sentiment, and the report could lead the EUR/USD to give back the advance from earlier this week as the outlook for the world’s largest economy picks up. However, the slowdown in wage growth paired with the ongoing weakness in the labor market may bear down on consumer confidence, and a dismal survey is likely to weigh on the exchange rate as growth prospects deteriorate. In turn, the near-term rally in the EUR/USD may gather pace in the days ahead, and the pair may continue to recoup the losses from the previous month as investors diversify away from the reserve currency.

Potential Price Targets For The Release

EURUSD_Trading_the_U._of_Michigan_Confidence_Survey_body_ScreenShot083.png, EUR/USD: Trading the U. of Michigan Confidence Survey

How To Trade This Event Risk

Expectations for a rebound in household confidence encourages a bullish outlook for the greenback, and the market reaction could pave the way for a long U.S. dollar trade as the data reinforces an improved outlook for the world’s largest economy. Therefore, if the index rises to 56.9 or higher in August, we will need to see a red, five-minute candle subsequent to the release in order to establish 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 generate our first objective. The second target 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 winning.

On the other hand, fears of a double-dip recession paired with the slowing recovery in the labor market may bear down on household confidence, and a dismal report may lead the FOMC to expand monetary policy further in order to balance the risks for the region. As a result, if the survey weakens from the previous month, we will carry out the same setup for a long euro-dollar trade as the short position mentioned above, just in reverse.

Impact that the 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)

AUG 2011

08/12/2011 13:55 GMT

62.0

54.9

-57

-30

August 2011 U. of Michigan Confidence Survey

Household sentiment in the U.S. fell to the lowest level since May 1980, with the U. of Michigan survey tumbling to 54.9 in August from 63.7 in the previous month, and conditions may deteriorate further over the remainder of the year as the world’s largest economy faces a slowing recovery. As the data highlights a dour outlook for future growth, the Federal Reserve may stand behind its pledge to retain the zero interest rate policy until mid-2013, and the central bank may keep the door open to conduct another round of quantitative easing in order to balance the risks for the region. At the same time, the FOMC may employ a broad range of tools to stimulate the ailing economy given the ongoing weakness within the private sector, and we are likely to see Chairman Ben Bernanke maintain a highly dovish outlook for monetary policy as the fundamental outlook remains clouded with high uncertainty. The data weighed on market sentiment, pushing the EUR/USD back down to 1.4210, but the greenback lost ground throughout the North American trade, with the exchange rate settling at 1.4247 at the end of the day.

EURUSD_Trading_the_U._of_Michigan_Confidence_Survey_body_ScreenShot082.png, EUR/USD: Trading the U. of Michigan Confidence Survey

Questions? Comments? Join us in the DailyFX Forum

Join Currency Analyst David Song 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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