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EUR/USD: Trading the Advance 3Q U.S. GDP Report

EUR/USD: Trading the Advance 3Q U.S. GDP Report

2011-10-26 18:16:00
David Song, Currency Strategist
Share:

Trading the News: U.S. GDP

What’s Expected:

Time of release: 10/27/2011 12:30 GMT, 8:30 EST

Primary Pair Impact: EURUSD

Expected: 2.5%

Previous: 1.3%

DailyFX Forecast: 2.0% to 3.0%

Why Is This Event Important:

The advanced 3Q GDP report is expected to show the world’s largest economy expanding at an annual rate of 2.5%, and the faster pace of growth may instill a bullish outlook for the U.S. dollar as it curbs the risk of seeing a double-dip recession. As the economic recovery gathers pace, the Federal Reserve may preserve its current policy throughout the remainder of the year, and we may see the central bank talk down speculation for another round of quantitative easing as growth and inflation pick up. However, the FOMC may keep the door open to expand monetary policy further given the ongoing weakness within the private sector, and the central bank may carry its easing cycle into the following year in an effort to encourage a sustainable recovery.

Recent Economic Developments

The Upside

Release

Expected

Actual

Capital Goods Orders Non-Defense ex Aircrafts (SEP)

0.5%

2.4%

Advance Retail Sales (SEP)

0.7%

1.1%

Change in Non-Farm Payrolls (SEP)

60K

103K

The Downside

Release

Expected

Actual

Consumer Confidence (OCT)

46.0

39.8

Consumer Price Index (YoY) (SEP)

3.9%

3.9%

Personal Income (AUG)

0.1%

-0.1%

The ongoing expansion in private sector consumption paired with the pickup in employment should help to foster an upbeat GDP report, and an above-forecast GDP print may lead the EUR/USD to give back the advance from earlier this month as the fundamental outlook for the world’s largest economy improves. However, heightening price pressures paired with the slowdown in wage growth may drag on economic activity, and a dismal GDP report could weigh on the exchange rate as market participants raise bets for QE3. In turn, the EUR/USD may extend the rebound from earlier this month, and we may see the pair may work its way back towards the 78.6% Fibonacci retracement from the 2009 high to the 2010 low around 1.4440-50 as the U.S. faces a growing risk of a double-dip recession.

Potential Price Targets For The Release

EURUSD_Trading_the_Advance_3Q_U.S._GDP_Report_body_ScreenShot011.png, EUR/USD: Trading the Advance 3Q U.S. GDP Report

How To Trade This Event Risk

Forecasts for a faster pace of growth encourages a bullish bias for the greenback, and the market reaction could set the stage for a long U.S. dollar trade as the outlook for the world’s largest economy improves. Therefore, if GDP expand 2.5% or greater in the third-quarter, we will need a red, five-minute candle subsequent to the report 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 order to lock-in our profits.

On the other hand, stagnant wage growth paired with the higher rate of inflation may lead to a dismal growth report, and a soft growth reading is likely to weigh on the exchange rate as market participants see the Fed expanding monetary policy further. As a result, if GDP expands less than 2.0%, we will implement the same strategy for a long euro-dollar trade as the short position laid out above, just in the opposite direction.

Impact that U.S. GDP report has had on USD during the last quarter

Period

Data Released

Estimate

Actual

Pips Change

(1 Hour post event )

Pips Change

(End of Day post event)

2Q A 2011

7/29/2011 12:30 GMT

1.8%

1.3%

+113

+114

2Q 2011 Advanced U.S. GDP

Economic activity in the U.S. increased at an annualized pace of 1.3% during the three-months through June, while personal consumption increased 0.1% during the same period amid forecasts for a 0.8% expansion. A deeper look at the report showed a 7.1% rise in gross private investments, which was followed by a 4.7% rise in net exports, while government spending weakened another 1.1% after contracting 5.9% during the first three-months of the year. The slowing recovery in the world’s largest economy may prompt the Federal Reserve to expand monetary policy further in the second-half of the year, and the central bank may keep the door open to conduct another round of quantitative easing in an effort to stem the risk of a double-dip recession. The weaker-than-expected GDP print weighed on the greenback, with the EUR/USD climbing above 1.4300, and the reserve currency struggled to hold its ground throughout the North American trade as the exchange rate settled at 1.4371 at the end of the day.

EURUSD_Trading_the_Advance_3Q_U.S._GDP_Report_body_ScreenShot015.png, EUR/USD: Trading the Advance 3Q U.S. GDP Report

--- Written by David Song, Currency Analyst

To contact David, e-mail dsong@dailyfx.com. Follow me on Twitter at @DavidJSong

To be added to David's e-mail distribution list, send an e-mail with subject line "Distribution List" to dsong@dailyfx.com.

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

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