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

Trading the News: U. of Michigan Confidence Survey

What’s Expected:

Time of release: 01/13/2012 14:55GMT, 9:55 EST

Primary Pair Impact: EURUSD

Expected: 71.5

Previous: 69.9

DailyFX Forecast: 71.0 to 74.0

Why Is This Event Important:

The U. of Michigan Confidence survey is anticipated to increase to 71.5 in January, which would mark the highest reading since June, and the pickup in household sentiment could prop up the USD as it dampens the prospects for additional monetary support. As private sector activity in the world’s largest economy gradually gathers pace, the more robust recovery certainly limits the Fed’s scope to conduct another round of quantitative easing, and we should see the central bank endorse a wait-and-see approach throughout 2012 as the region skirts a double-dip recession. However, should the report fall short of market expectations, the development may fuel speculation for QE3, and the central bank may keep the door open to expand monetary policy further in order to stem the downside risk for growth and inflation.

Recent Economic Developments

The Upside

The Downside

The slower rate of inflation paired with the pickup in private sector activity should help to boost household sentiment, and a positive development could push the EUR/USD below the 23.6% Fibonacci retracement from the 2009 high to the 2010 low around 1.2630-50 as the fundamental outlook for the world’s largest economy improves. However, the ongoing slack within the housing market paired with the slowdown in wage growth may drag on confidence, and the Fed may show an increased willingness to ease policy further in an effort to encourage a sustainable recovery. In turn, the short-term rebound in the EUR/USD may gather pace over the remainder of the week, and we may see the exchange rate climb back towards the 38.2% Fib around 1.3100 to test for resistance.

Potential Price Targets For The Release

How To Trade This Event Risk

A fifth consecutive rise in the U. of Michigan survey should foster a bullish reaction in the greenback, and market volatility following the release could pave the way for a long U.S. dollar trade as the data dampens the prospects for QE3. Therefore, if the index advances to 71.5 or higher, we will need a red, five-minute candle following 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 breakeven once the first trade reaches its mark in order to safeguard our profits.

In contrast, subdued wage growth paired with the persistent weakness within the private sector may bear down on household sentiment, and we may see Americans turn pessimistic towards the economy as policy makers struggle to spur a speedy recovery. As a result, if the report falls short of forecasts or unexpectedly weakens from the previous, we will carry out the same setup for a long euro-dollar trade as the short position laid out above, just in the opposite direction.

Impact that the U. of Michigan Confidence survey has had on USD during the last month

December 2011 U. of Michigan Confidence Survey

U.S. consumer sentiment hit a six-month high in December, with the U. of Michigan survey advancing to 67.7 from 64.1 the month prior, and household confidence may continue to pick up over the coming months as the recovery in the world’s largest economy gradually gathers pace. A deeper look at the report showed the gauge for future expectations increasing to 61.1 from 55.4 in November, while inflation expectations for the next 12-months slipped to 3.1% from 3.2% during the same period. As the pickup in household sentiment raises the outlook for private sector consumption, the development may limit the Fed’s scope to expand monetary policy further, and we may see the FOMC maintain a wait-and-see in 2012 as growth prospects improve. The initial reaction to the U. of Michigan was certainly short-lived, with the EUR/USD slipping back below 1.3350, but the dollar struggled to hold its ground during the North American trade as the exchange rate settled at 1.3383 at the end of the day.

--- Written by David Song, Currency Analyst

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

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