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

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

2011-12-08 20:47:00
David Song, Currency Strategist
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Trading the News: U. of Michigan Confidence Survey

What’s Expected:

Time of release: 12/09/2011 14:55GMT, 9:55 EST

Primary Pair Impact: EURUSD

Expected: 65.8

Previous: 64.1

DailyFX Forecast: 65.0 to 67.0

Why Is This Event Important:

The U. of Michigan Confidence survey is expected to increase to 65.8 in December from 64.1 in the previous month, and the ongoing improvement in household sentiment could prop up the U.S. dollar as the development instills an improved outlook for the world’s largest economy. As the recovery gradually gathers pace, we may see the FOMC talk down speculation for another round of quantitative easing, and the central bank may uphold its current policy throughout the following year as the region skirt a double-dip recession. However, a dismal confidence report could reignite speculation for additional monetary support, and Fed Chairman Ben Bernanke may keep the door open for QE3 as the central bank aims to stem the downside risks for growth and inflation.

Recent Economic Developments

The Upside

Release

Expected

Actual

Consumer Credit (OCT)

$7.000B

$7.645B

Personal Income (OCT)

0.3%

0.4%

Advance Retail Sales (OCT)

0.3%

0.5%

The Downside

Release

Expected

Actual

Change in Non-Farm Payrolls (NOV)

125K

120K

Gross Domestic Product (QoQ) (Annualized) (3Q S)

2.5%

2.0%

Consumer Price Index ex Food & Energy (YoY) (OCT)

3.9%

3.9%

The expansion in consumer credit paired with the rise in wage growth should help to prop up household sentiment, and an above-forecast print may lead the EUR/USD to give back the rebound from 1.3145 as growth in the U.S. outpaces the recovery in Europe. However, the protracted recovery in the labor market paired with the stickiness in price growth may bear down on consumer confidence, and the Federal Reserve may hold a cautious outlook for the region given the ongoing slack within the real economy. In turn, a dismal confidence report could spark a rebound in the EUR/USD, and we may see the exchange rate work its way back towards the 50.0% Fibonacci retracement from the 2009 high to the 2010 low around 1.3500 as the outlook for the world’s largest economy deteriorates.

Potential Price Targets For The Release

EURUSD_Trading_the_U._of_Michigan_Confidence_Survey_body_ScreenShot027.png, EUR/USD: Trading the U. of Michigan Confidence Survey

How To Trade This Event Risk

Forecasts for a fourth consecutive rise in the U. of Michigan survey instills a bullish outlook for the greenback, and the market reaction could pave the way for a long U.S. dollar trade as growth prospects improve. Therefore, if the index advances to 65.8 or higher in December, we will need to see a red, five-minute candle subsequent to the release to generate 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 establish our first objective. The second target will b 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 preserve our profits.

In contrast, the slowdown in economic activity paired with the tepid pace of job growth may bear down on household sentiment, and a dismal U. of Mich report is likely to dampen the appeal of the greenback as the data instills a weakened outlook for growth. As a result, if the survey falls short of market expectations or unexpectedly weakens from the previous month, we will carry out the same strategy for a long euro-dollar trade as the short position laid out 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)

NOV 2011

11/11/2011 14:55 GMT

61.5

64.2

+50

+66

November 2011 U. of Michigan Confidence Survey

Consumer confidence in the world’s largest economy improved for the third consecutive month in November, with the U. of Michigan survey advancing to 64.2 from 60.9 in the previous month. The breakdown of the report showed the gauge for future expectations increased to 56.2 from 51.8 in October to mark the highest reading since June, while consumer inflation expectations for the next 12-months held steady at 3.2% for the second consecutive month. As the ongoing improvement in household sentiment raises the outlook for future growth, we may see the Federal Reserve raise its fundamental assessment for the region, and the central bank may talk down speculation for another large-scale asset purchase program as Fed officials expect the economic recovery to gradually gather pace over the coming months. The initial reaction to the confidence report was short-lived as the EUR/USD pushed back above 1.3700, and the reserve currency traded heavy throughout the North American session as the exchange rate settled at 1.3754 at the end of the day.

EURUSD_Trading_the_U._of_Michigan_Confidence_Survey_body_ScreenShot026.png, EUR/USD: Trading the U. of Michigan Confidence Survey

--- 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.

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

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