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EURUSD: Trading the U. of Michigan Confidence Report

EURUSD: Trading the U. of Michigan Confidence Report

David Song, Strategist

Trading the News: U. of Michigan Confidence

What’s Expected:

Time of release: 07/13/2012 13:55 GMT, 9:55 EDT

Primary Pair Impact: EURUSD

Expected: 73.5

Previous: 73.2

DailyFX Forecast: 73.0 to 74.5

Why Is This Event Important:

The U. of Michigan Confidence survey for July is expected to increase to 73.5 from 73.2 in the previous month and the rebound in household sentiment may increase the appeal of the USD as it dampens expectations for additional monetary support. Indeed, the FOMC Minutes suggest that the central bank is moving away from quantitative easing as the major sees a limited scope to push through another large-scale asset purchase program, and we may see the committee continue to scale back its dovish tone for monetary policy as the recovery gets on a more sustainable path.

Recent Economic Developments

The Upside

Release

Expected

Actual

Consumer Credit (MAY)

$8.500B

$17.117B

Average Hourly Earnings (YoY) (JUN)

1.7%

2.0%

Personal Income (MAY)

0.2%

0.2%

The Downside

Release

Expected

Actual

Non-Farm Payrolls (JUN)

100K

80K

Unemployment Rate (JUN)

8.2%

8.2%

Consumer Confidence (JUN)

63.0

62.0

The ongoing expansion in private sector credit paired with the rebound in wage growth may prop up household confidence, and a positive development may encourage the Fed raise its fundamental assessment for the region as it raises the outlook for growth. However, the protracted recovery in the labor market may continue to sap consumer confidence, and a second consecutive decline in the survey may fuel speculation for QE3 as the Fed keeps the door open to expand monetary policy further.

Potential Price Targets For The Release

EURUSD_Trading_the_U._of_Michigan_Confidence_Report_body_ScreenShot042.png, EURUSD: Trading the U. of Michigan Confidence Report

As the downward trend in the EURUSD continues to take shape, we should see the exchange rate mark fresh 2012 lows throughout the second-half of the year, and the pair looks poised to give back the rebound from 2010 (1.1875) as it carves out a lower high coming into July. As the relative strength index flirts with oversold territory, a break below 30 should pave the way for lower prices, but we may see a short-term correction in the exchange rate should the oscillator hold steady.

How To Trade This Event Risk

Expectations for a rebound in household sentiment certainly instills a bullish outlook for the greenback, and a positive development may set the stage for a long U.S. dollar trade as it curbs bets for more easing. Therefore, if the print comes in at 73.5 or higher, 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 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 cost once the first trade hits its mark in an effort to lock-in our gains.

In contrast, households may become downbeat towards the economy amid the slowing recovery paired with the ongoing slack in the labor market, and a dismal print may fuel speculation for additional monetary support as the Fed aims to encourage a stronger recovery. As a result, if the data falls short of market expectations, we will implement 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)

JUN P 2012

6/15/2012 13:55 GMT

77.5

74.1

+14

+23

April 2012 U. of Michigan Confidence

EURUSD_Trading_the_U._of_Michigan_Confidence_Report_body_ScreenShot027.png, EURUSD: Trading the U. of Michigan Confidence Report

Household confidence weakened in June, with the U. of Michigan survey slipping to 74.1 from 79.3 the month prior, while the five-year outlook for inflation advanced to 2.9% from 2.7% during the same period. The greenback struggled to hold its ground following the report, with the EURUSD pushing back above 1.2650, but we saw the pair consolidate during the day as the pair closed at 1.2633.

--- 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.

Questions? Comments? Join us in the DailyFX Forum

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

Meet the DailyFX team in Las Vegas at the annual FXCM Traders Expo, November 2-4, 2012 at the Rio All Suite Hotel & Casino. For additional information regarding the schedule, workshops and accommodations, visit the FXCM Trading Expo website.

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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