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EURUSD: Trading the U.S. Durable Goods Orders Report

EURUSD: Trading the U.S. Durable Goods Orders Report

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Trading the News: U.S. Durable Goods Orders

What’s Expected:

Time of release:05/24/2012 12:30 GMT, 8:30 EDT

Primary Pair Impact: EURUSD

Expected: 0.2%

Previous: -4.2%

DailyFX Forecast: 0.3% to 1.5%

Why Is This Event Important:

Demands for U.S. durable goods are expected to increase 0.2% in April and the rebound in private sector consumption may instill an improved outlook for the world’s largest economy as it remains one of the leading drivers of growth. As the U.S. gets on a more sustainable path, we should see the Federal Reserve move away from its easing cycle, and the limited scope for another large-scale asset purchase program should prop up the greenback as market participants start to slowing price in a rate hike for the next 12-month. However, as the sovereign debt crisis continues to pose a threat to the world financial system, it seems as though the FOMC will carry its wait-and-see approach into the second-half of the year, and the central bank may keep the door open to expand monetary policy further in an effort to secure a sustainable recovery.

Recent Economic Developments

The Upside

Release

Expected

Actual

U. of Michigan Confidence (MAY P)

76.0

77.8

Personal Consumption (1Q A)

2.3%

2.9%

Consumer Credit (MAR)

$9.800B

$21.355B

The Downside

Release

Expected

Actual

Change in Non-Farm Payrolls (APR)

160K

115K

Average Weekly Earnings (YoY) (APR)

2.0%

1.8%

ADP Employment Change (APR)

170K

119K

The rise in household sentiment paired with the resilience in private sector consumption certainly bodes well for durable goods, and a marked rebound should prop up the USD as it dampens expectations for additional monetary support. However, subdued wage growth paired with the ongoing weakness in the labor market may continue to sap demands for large-ticket items, and another dismal print may fuel speculation for QE3 as Fed Chairman Ben Bernanke maintains a dovish tone for monetary policy. In turn, a weaker-than-expected report could spark a short-term reversal in the EURUSD, and we may see the exchange rate pare the sharp decline from earlier this week as interest rate expectations falter.

Potential Price Targets For The Release

EURUSD_Trading_the_U.S._Durable_Goods_Orders_Report_body_05.png, EURUSD: Trading the U.S. Durable Goods Orders Report

A look at the encompassing structure sees the EUR/USD trading within the confines of a broad descending channel formation dating back to August 29th with the euro making fresh 2012 lows today below the 50% Fibonacci extension taken from the October 27th and February 29th crests at 1.2670. Downside pressure on the single currency is expected to persist with our initial objective now eyed at the key 61.8% extension at 1.2485. Interim topside resistance now stands at former support around 1.2670 backed by 1.2865 with a breach here risking a more substantial correction to the February lows at 1.2970. Note that the slope and positioning of the daily RSI suggests the decline may have some momentum behind it with the oscillator recently hitting its lowest levels seen since May of 2010 when the euro plummeted to 1.1875 in the following sessions.

EURUSD_Trading_the_U.S._Durable_Goods_Orders_Report_body_05_1.png, EURUSD: Trading the U.S. Durable Goods Orders Report

The 30min scalp chart shows the EUR/USD holding within the confines of a descending channel formation dating back to May 1st with the pair trading just below interim resistance at the 38.2% Fibonacci extension taken from the May 1st and 21st crests at 1.2580. Look for the euro to remain in consolidation as we head into Asia-Pacific trade with a topside break eyeing subsequent resistance levels at 1.2625, the 23.6% extension at 1.2673, and the 1.27-figure. A breach above channel resistance alleviates some of the pressure on the single currency and negates our interim bias for the pair with such a scenario eyes topside targets at 1.2780 and the weekly high at 1.2823. Soft support rests at 1.2550 with a break below this level targeting floors at the 50% extension at 1.2505 and our objective at 1.2485. Should the print prompt a bullish dollar response, look to target downside levels with a break below channel support offering further conviction on our directional bias.

How To Trade This Event Risk

Expectations for a rebound in U.S. durable goods certainly casts a bullish outlook for the greenback, and a positive development may pave the way for a long U.S. dollar trade as market participants scale back bets for QE3. Therefore, if the print tops market forecast, we will need to see a red, five-minute candle following the release to establish a sell entry on two-lots of EURUSD. Once these conditions are fulfilled, 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 hits its mark in an effort to preserve our winnings.

In contrast, the lack of wage growth paired with the ongoing weakness in employment may continue to drag on consumption, and a dismal report may dampen the appeal of the reserve currency as market participants maintain bets for more easing. As a result, if orders fall short of expectations, we will implement the same strategy for a long euro-dollar trade as the short position mentioned above, just in the opposite direction.

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)

MAR 2012

4/25/2012 12:30 GMT

-1.7%

-4.2%

+10

+9

March 2012 U.S. Durable Goods Orders

EURUSD_Trading_the_U.S._Durable_Goods_Orders_Report_body_ScreenShot037.png, EURUSD: Trading the U.S. Durable Goods Orders Report

Orders for U.S. durable goods tumbled 4.2% in March after expanding a revised 2.0% the month prior, while demands for non-defense capital goods excluding aircrafts, which acts as a gauge for business investments, slipped 0.8% following a 2.8% rise in February. We saw a fairly mixed reaction to the release as the EURUSD quickly reversed the dip below 1.3200, and the reserve currency struggled to hold its ground throughout the North American trade as the pair ended the day at 1.3215.

--- Written by David Song, Currency Analyst and Michael Boutros, Currency Strategist

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

To contact Michael email mboutros@dailyfx.comor follow him on Twitter @MBForex.

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

To be added to Michael’s email distribution list, send an email with subject line “Distribution List” to mboutros@dailyfx.com

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