Trading the News: U.S. Durable Goods Orders

What’s Expected:

Time of release: 01/26/2012 13:30 GMT, 8:30 EST

Primary Pair Impact: EURUSD

Expected: 2.0%

Previous: 3.8%

DailyFX Forecast:1.8% to 2.2%

Why Is This Event Important:

Orders for U.S. durable goods are projected to increase another 2.0% in December and the rise in private sector consumption should increase the appeal of the USD as the development raises the prospects for future growth. As the recovery gradually gathers pace, the Fed should continue to soften its dovish tone for monetary policy, and the central bank may endorse a wait-and-see approach for 2012 as the risk of a double-dip recession subside. However, as Fed Chairman Ben Bernanke keeps the door open to expand policy further, a dismal report could prop up speculation for another round of quantitative easing, and the reserve currency may trade heavy over the near-term as the central bank pledges to preserve the zero interest rate policy well into 2014.

Recent Economic Developments

The Upside

Release

Expected

Actual

U. of Michigan Confidence (JAN P)

71.5

74.0

Consumer Credit (NOV)

$7.000B

$20.374B

Change in Non-Farm Payrolls (DEC)

155K

200K

The Downside

Release

Expected

Actual

Advance Retail Sales (DEC)

0.3%

0.1%

ICSC Chain Store Sales (YoY) (DEC)

4.0%

3.5%

Personal Incomes (NOV)

0.2%

0.1%

The rise in household sentiment paired with the marked expansion in consumer should help to stimulate private sector consumption, and a positive development could pave the way for a near-term reversal in the EUR/USD as the fundamental outlook for the world’s largest economy improves. However, the slowdown in household spending paired with the soft rate of wage growth may limit demands for large ticket items, and we may see the FOMC may take additional steps to stem the downside risks for the region as policy makers aim to encourage a stronger recovery. In turn, the short-term rally in the euro-dollar may gather pace over the remainder of the week, and the exchange rate may continue to retrace the decline from December as the pair threatens the 38.2% Fibonacci retracement from the 2009 high to the 2010 low around 1.3100.

Potential Price Targets For The Release

EURUSD_Trading_the_U.S._Durable_Goods_Orders_Report_body_ScreenShot045.png, EUR/USD: Trading the U.S. Durable Goods Orders Report

How To Trade This Event Risk

Increased demands for U.S. durable goods instills a bullish outlook for the greenback, and the market reaction could pave the way for a long U.S. dollar trade as market participants scale back speculation for another large-scale asset purchase program. As a result, if orders increase 2.0% or greater in December, we will need to see a red, five-minute candle following the release to generate a sell entry on two-lots of EUR/USD. Once these conditions are met, we will place the initial stop at the nearby swing high or a reasonable distance from the entry, 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 breakeven once the first trade reaches its mark in order to lock-in our winnings.

On the other hand, easing wage growth paired with the slowdown in retail spending could dampen demands for large ticket items, and a dismal durable goods report should spark a bearish reaction in the USD as it dampens the outlook for the world’s largest economy. As a result, if demands increase less than 1.8%, we will implement the same strategy for a long euro-dollar trade as the short position mentioned above, just in reverse.

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)

NOV 2011

12/23/2011 13:30 GMT

2.2%

3.8%

-24

-21

November 2011 U.S. Durable Goods Orders

EURUSD_Trading_the_U.S._Durable_Goods_Orders_Report_body_ScreenShot044.png, EUR/USD: Trading the U.S. Durable Goods Orders Report

Demands for U.S. durable goods increased 3.8% in November to mark the fastest pace of growth in four-months, durables excluding transports advanced another 0.3% following a 1.6% expansion in the previous month. However, the breakdown of the report showed orders for nondefense capital goods excluding aircrafts, which acts as a proxy for business spending, slipped another 1.2% after contracting 0.9% in October, while inventories climbed 0.6% during the same period. As private sector consumption gathers pace, the more robust recovery may dampen the Fed’s scope to ease monetary policy further, and the central bank endorse a wait-and-see approach for 2012 as growth prospects improve. Indeed, the better-than-expected print propped up the greenback, with the EUR/USD slipping back below 1.3050, and the reserve currency held its ground going into the end of the day as the pair closed at 1.3040.

--- Written by David Song, Currency Analyst

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

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