Trading the News: U.S. Consumer Confidence

What’s Expected:

Time of release: 01/31/2012 15:00 GMT, 10:00 EST

Primary Pair Impact: EURUSD

Expected: 68.0

Previous: 64.5

DailyFX Forecast: 68.5 to 70.0

Why Is This Event Important:

The Conference Board’s Consumer Confidence survey is expected to increase to an 11-month high of 68.0 in January, and the development may increase the appeal of the U.S. dollar as it dampens the prospects for another round of quantitative easing. As the more robust recovery encourages an improved outlook for the world’s largest economy, we should see the Federal Reserve maintain a wait-and-see approach throughout 2012, and the central bank may look to phase out its emergency measures towards the end of the year as the risk of a double-dip recession subsides. However, as Fed Chairman Ben Bernanke continues to highlight the ongoing weakness within the real economy, the central bank head may keep the door open to expand policy further, and we may see a growing rift within the committee as the fundamental outlook remains clouded with high uncertainty.

Recent Economic Developments

The Upside

Release

Expected

Actual

Personal Income (DEC)

0.4%

0.5%

Consumer Credit (NOV)

$7.000B

$20.374B

Change in Non-Farm Payrolls (DEC)

155K

200K

The Downside

Release

Expected

Actual

Personal Spending (DEC)

0.1%

0.0%

Personal Consumption (4Q A)

2.4%

2.0%

Advance Retail Sales (DEC)

0.3%

0.1%

The rebound in wage growth paired with the expansion in private credit should help to shore up consumer confidence, and a positive development may fuel the short-term reversal in the EUR/USD as market participants scale back bets for QE3. However, the Conference Board’s survey may show a lower level of confidence in light of the slowdown in private sector consumption , and a weak household sentiment print may encourage the Fed to talk up expectations for more quantitative easing in an effort to promote a stronger recovery. In turn, the pullback in the EUR/USD may be short-lived, and the exchange rate may continue to retrace the decline from December, which could open the door for a test of 1.3500, the 50.0% Fibonacci retracement from the 2009 high to the 2010 low.

Potential Price Targets For The Release

EURUSD_Trading_the_U.S._Consumer_Confidence_Survey_body_ScreenShot061.png, EUR/USD: Trading the U.S. Consumer Confidence Survey

How To Trade This Event Risk

As household sentiment is expected to improve for the third consecutive month in January, the data fosters a bullish outlook for the reserve currency, and the market reaction could pave the way for a long U.S. dollar trade as market participants curb bets for another large-scale asset purchase program. Therefore, if the Conference Board’s survey advances to 68.0 or higher, we will need to see a red, five-minute candle following the release 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 preserve our profits.

In contrast, household may become less optimistic towards the economy in light of the ongoing slack within the real economy, and the Federal Reserve may continue to strike a dovish outlook for the region as policy makers try to promote a stronger recovery. In turn, a reading below 68.0 could spark a bearish reaction in the USD, and we will utilize the same strategy for a long euro-dollar trade as the short position laid out above, just in reverse.

Impact that the U.S. Consumer 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)

DEC 2011

12/27/2011 15:00 GMT

58.9

64.5

0

+2

December 2011 U.S. Consumer Confidence

EURUSD_Trading_the_U.S._Consumer_Confidence_Survey_body_ScreenShot062.png, EUR/USD: Trading the U.S. Consumer Confidence Survey

Consumer confidence in the world’s largest economy hit an eight month high in December, with the Conference Board’s survey advancing to 64.5 from a revised 55.2 the month prior, and household sentiment should continue to pick up over the near-term as the recovery gradually gathers pace. A deeper look at the report showed the gauge for future expectations increased to 76.4 during the same period to mark the highest reading since May, while inflation expectations for the next 12-months slipped to 5.4% from 5.6%. As the fundamental outlook for the U.S. improves, we should see the Federal Reserve continue to soften its dovish tone for monetary policy, and the central bank may talk down speculation for another large-scale asset purchase program as its ballooning balance sheet comes under scrutiny. Indeed, the better-than-expected confidence report fueled risk-taking behavior, with the EUR/USD extending the advance from the morning trade, but the pair consolidated going into the close as the exchange rate settled at 1.3067 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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