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EURUSD- Trading the U. of Michigan Confidence Survey

EURUSD- Trading the U. of Michigan Confidence Survey

David Song, Strategist

Trading the News: U. of Michigan Confidence

What’s Expected:

Time of release: 02/15/2012 14:55 GMT, 9:55 EST

Primary Pair Impact: EURUSD

Expected: 74.8

Previous: 73.8

DailyFX Forecast: 72.0 to 76.0

Why Is This Event Important:

The U. of Michigan Confidence survey is projected to increase to 74.8 from 73.8 in January and the rebound in household sentiment may increase the appeal of the U.S. dollar as it raises the outlook for private sector consumption - one of the leading drivers of growth. As the economic recovery gradually gathers pace, we’ve seen a growing number of Fed officials drop their dovish tone for monetary policy, and the FOMC may start to discuss a tentative exit strategy later this year as the world’s largest economy gets on a more sustainable path.

Recent Economic Developments

The Upside

Release

Expected

Actual

Consumer Credit (DEC)

$14.000B

$14.595B

Average Weekly Earnings (YoY) (JAN)

2.1%

2.1%

Personal Income (DEC)

0.8%

2.6%

The Downside

Release

Expected

Actual

Advance Retail Sales (JAN)

0.1%

0.1%

Change in Non-Farm Payrolls (JAN)

165K

157K

Personal Spending (DEC)

0.3%

0.2%

Stronger wage growth along with the expansion in private sector credit should help to prop up consumer sentiment, and a large pickup in the U. of Michigan survey may spark a bullish reaction in the USD as the ongoing improvement in the real economy dampens the scope for more quantitative easing. However, the protracted recovery in the labor market paired with the slowdown in retail spending may prompt a further decline in household confidence, and a dismal print may drag on the greenback as it fuels bets for additional monetary support.

Potential Price Targets For The Release

Forex_EURUSD-_Trading_the_U._of_Michigan_Confidence_Survey_body_ScreenShot267.png, EURUSD- Trading the U. of Michigan Confidence Survey

As former trendline support on the relative strength index appears to be acting as resistance, the pullback from 1.3709 looks poised to gather pace over the near-term, and we may see the EURUSD continue to give back the rally from the previous year as the fundamental outlook for the U.S. improves. In turn, we are looking for a move back towards 38.2% Fibonacci retracement from the 2009 high to the 2010 low around 1.3120, and we may see a key reversal take shape in the coming days should it breakout of the ascending channel dating back to July.

How To Trade This Event Risk

Forecasts for a rebound in consumer confidence casts a bullish outlook for the greenback, and a positive development may pave the way for a long U.S. dollar trade as it limits the Fed’s scope to expand the balance sheet further. Therefore, if the U. of Michigan survey advances to 74.8 or higher, we will need to see a red, five-minute candle following the release to generate a sell entry on two-lots of EURUSD. Once these conditions are fulfilled, 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 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 order to preserve our profits.

In contrast, the ongoing slack in the real economy along with the protracted recovery in the labor market may continue to drag on household sentiment, and another downtick in the survey may weakening the dollar as it dampens the outlook for growth. As a result, if the survey falls short of market expectations, we will carry out the same setup for a long euro-dollar trade as the short position laid out above, but in the opposite direction.

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)

SEP P 2012

1/18/2012 14:55 GMT

75.0

71.3

-25

-4

September 2012 U. of Michigan Confidence

Forex_EURUSD-_Trading_the_U._of_Michigan_Confidence_Survey_body_ScreenShot266.png, EURUSD- Trading the U. of Michigan Confidence Survey

U.S. household confidence unexpectedly weakened in January, with the U. of Michigan survey slipping to 71.3 from 72.9 the month prior, and we may see consumer sentiment weaken further in 2013 amid the rise in payroll taxes. Despite the dismal print, we saw the EURUSD track lower following a shift in market sentiment, but the move below the 1.3300 figure was short-lived as the pair ended the day at 1.3310.

--- 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, please follow this link.

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