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EUR/USD- Trading the U. of Michigan Confidence Survey

EUR/USD- Trading the U. of Michigan Confidence Survey

2013-05-17 08:00:00
David Song, Strategist
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Trading the News: U. of Michigan Confidence

What’s Expected:

Time of release: 05/17/2013 13:55 GMT, 9:55 EDT

Primary Pair Impact: EURUSD

Expected: 78.0

Previous: 76.4

DailyFX Forecast:74.0 to 80.0

Why Is This Event Important:

The U. of Michigan Confidence survey is expected to increase to 78.0 from 76.4 in April, and the rebound in consumer sentiment may increase the appeal of the U.S. dollar as it raises the outlook for private sector spending - one of the leading drivers of growth. As the world’s largest economy gets on a more sustainable path, there’s been a growing discussion at the Fed to scale back on quantitative easing, and we see the central bank start to discuss a tentative exit strategy in the second-half of the year as economic recovery gradually gathers pace.

Recent Economic Developments

The Upside

Release

Expected

Actual

Advance Retail Sales (APR)

-0.3%

0.1%

Change in Non-Farm Payrolls (APR)

140K

165K

Personal Spending (MAR)

0.0%

0.2%

The Downside

Release

Expected

Actual

Housing Starts (MoM) (APR)

-6.4%

-16.5%

Consumer Credit (MAR)

$15.600B

$7.966B

Personal Income (MAR)

0.4%

0.2%

Household sentiment may improve in May amid the resilience in private sector consumption along with the pickup in job growth, and a sharp rebound in the U. of Michigan survey may encourage the FOMC to adopt a more neutral to hawkish tone for monetary policy as the outlook for growth improves. However, subdued wage growth paired with the recent lull in the housing market may drag on consumer confidence, and a dismal print may drag on the dollar as raises the Fed’s scope to maintain its highly accommodative policy stance throughout 2013.

Potential Price Targets For The Release

Forex_EURUSD-_Trading_the_U._of_Michigan_Confidence_Survey_body_ScreenShot251.png, EUR/USD- Trading the U. of Michigan Confidence Survey

As the head-and-shoulders formation on the EURUSD continues to take shape, the pair looks poised for a move back towards the 23.6% Fibonacci retracement from the 2009 high to the 2010 low around 1.2640-50, and the bearish pattern may continue to play out over the next 24-hours of trading should we see a rebound in U.S. consumer confidence. However, a dismal U. of Michigan survey may prop up the EURUSD ahead of the next FOMC interest rate decision on June 19, but we should see the euro-dollar hold below the 38.2% retracement around 1.3120 as the Fed starts to drop its dovish tone for monetary policy.

How To Trade This Event Risk

Forecasts for a rebound in household sentiment instills a bullish outlook for the greenback, and a positive print may set the stage for a long U.S. dollar trade as it dampens bets for more Fed support. Therefore, if the U. of Michigan survey advances to 78.0 or higher, we will need a red, five-minute candle subsequent to 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 lock-in our gains.

In contrast, the persistent slack in the real economy along with slower wage growth may continue to drag on consumer confidence, and another downtick in the survey may drag on the dollar as it dampens the outlook for growth. As a result, if the survey falls short of market expectations, we will implement the same strategy for a long euro-dollar trade as the short position mentioned 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)

APR P 2013

04/12/2013 13:55 GMT

78.6

72.3

+22

+32

April 2013 U. of Michigan Confidence

Forex_EURUSD-_Trading_the_U._of_Michigan_Confidence_Survey_body_ScreenShot249.png, EUR/USD- Trading the U. of Michigan Confidence Survey

U.S. household confidence unexpectedly weakened in April, with the U. of Michigan survey falling to 72.3 from 78.6 the month prior, while inflation expectations for the next 12-months narrowed to 3.0% from 3.2% in March. The U.S. dollar struggled to hold its ground following the dismal release, with the EURUSD making its way towards the 1.3100 figure, and the greenback ended the day lower as the pair closed at 1.3106.

--- Written by David Song, Currency Analyst

To contact David, e-mail dsong@dailyfx.com.

Follow me on Twitter at @DavidJSong

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