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

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

David Song, Strategist

Trading the News: U. of Michigan Confidence

What’s Expected:

Time of release: 07/12/2013 13:55 GMT, 9:55 EDT

Primary Pair Impact: EURUSD

Expected: 84.7

Previous: 84.1

DailyFX Forecast: 82.0 to 86.0

Why Is This Event Important:

The U. of Michigan Confidence survey is expected to increase to 84.7 from 84.1 in June, and the rebound in household sentiment may foster a bullish reaction in the U.S. dollar as it raises the outlook for growth. Although Fed Chairman Ben Bernanke endorsed a highly accommodative policy stance for the world’s largest economy, we should see a growing discussion to taper the asset-purchase program as the recovery gradually gathers pace, and the central bank remains poised to switch gears later this year as the region gets on a more sustainable path.

Recent Economic Developments

The Upside

Release

Expected

Actual

Change in Non-Farm Payrolls (JUN)

166K

195K

Average Hourly Earnings (YoY) (JUN)

1.9%

2.2%

Personal Income (MAY)

0.2%

0.5%

The Downside

Release

Expected

Actual

ISM Non-Manufacturing (JUN)

54.0

52.2

Gross Domestic Product (Annualized) (QoQ) (1Q F)

2.4%

1.8%

Consumer Price Index (YoY) (MAY)

1.4%

1.4%

The ongoing improvement in the labor market along with the pickup in wage growth may help to produce a strong confidence report, and a positive development should heighten the appeal of the USD as it raises the Fed’s scope to scale back on quantitative easing. However, the persistent slack in the real economy paired with stronger price growth may drag on household sentiment, and a dismal print may encourage the Fed to retain its highly accommodative policy stance throughout the summer in order to promote a stronger recovery.

Potential Price Targets For The Release

Forex_EURUSD-_Trading_the_U._of_Michigan_Confidence_Survey_body_ScreenShot145.png, EUR/USD- Trading the U. of Michigan Confidence Survey

As the relative strength index snaps back from overbought territory, the EURUSD looks poised for a larger correction, but an upbeat U. of Michigan Confidence survey may produce a move back towards the 23.6% Fibonacci retracement around 1.2970 should the data raise the Fed’s scope to scale back on QE. However, a dismal print may trigger a more meaning run at the 50.0% retracement (1.3220-30) as it raises the likelihood of seeing the FOMC retain its highly accommodative policy stance throughout the summer months.

How To Trade This Event Risk

Forecasts for an uptick in the U. of Michigan confidence survey highlights a bullish outlook for the greenback, and a positive print may pave the way for a long U.S. dollar trade as it raises the outlook for growth. Therefore, if the report tops market expectations, 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 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 target. The second objective 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 order to protect our gains.

However, stronger inflation along with the ongoing slack in the real economy may drag on household sentiment, and a dismal confidence report may produce a bearish reaction in the greenback as it dampens the Fed’s scope to taper its asset-purchase program. As a result, if the figure fall back from 84.1, we will implement the same strategy for a long euro-dollar trade as the short position laid out above, just 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)

JUN P 2013

06/14/2013 13:55 GMT

84.5

82.7

+22

+25

June 2013 U. of Michigan Confidence

Forex_EURUSD-_Trading_the_U._of_Michigan_Confidence_Survey_body_ScreenShot144.png, EUR/USD- Trading the U. of Michigan Confidence Survey

The gauge for U.S. consumer sentiment narrowed to 82.7 in June from 84.5 the month prior, while inflation expectations for the next 12-months climbed to an annualized 3.2% to mark the highest reading since March. Indeed, the decline in consumer sentiment dragged on the dollar, with the EURUSD climbing above the 1.3325 region, and the greenback struggled to hold its ground throughout the North American trade as the pair closed at 1.3341.

--- Written by David Song, Currency Analyst

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

Follow me on Twitter at @DavidJSong

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