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Will Stronger 2Q GDP Spark a USD Breakout? Key Levels on Tap

Will Stronger 2Q GDP Spark a USD Breakout? Key Levels on Tap

2013-08-29 10:32:00
David Song, Strategist
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Trading the News: Preliminary U.S. Gross Domestic Product

The preliminary 2Q U.S. GDP report may act as a fundamental catalyst to spark a near-term rally in the U.S. dollar as we anticipate an upward revision in the growth rate.

What’s Expected:

Time of release: 08/29/2013 12:30 GMT, 8:30 EDT

Primary Pair Impact: EURUSD

Expected: 2.2%

Previous: 1.7%

DailyFX Forecast: 1.8% to 2.5%

Why Is This Event Important:

Should the world’s largest economy expand an annualized 2.2% in the second quarter, the faster rate of growth may further the Fed’s argument to taper its asset-purchase program at the September 17-18 meeting, and the FOMC may sound less dovish this time around central bank officials see a stronger recovery over the remainder of the year.

Expectations: Bullish Argument/Scenario

Release

Expected

Actual

ISM Non-Manufacturing (JUL)

53.1

56.0

ISM Manufacturing (JUL)

52.0

55.4

Non-Farm Productivity (2Q P)

0.6%

0.9%

We may see a large upward revision in the growth rate amid the pickup in business outputs, and a positive GDP report may heighten the bullish sentiment surrounding the reserve currency as the Fed looks to slowly move away from its easing cycle.

Risk: Bearish Argument/Scenario

Release

Expected

Actual

Durable Goods Orders (JUL)

-4.0%

-7.3%

Advance Retail Sales (MoM) (JUL)

0.3%

0.2%

Change in Non-Farm Payrolls (JUL)

185K

162K

Nevertheless, the slowdown in private sector consumption along with the ongoing weakness in job growth may drag on the growth rate, and a weaker-than-expected print may prompt the FOMC to retain its highly accommodative policy stance for an extended period of time as the committee aims to encourage a stronger recovery.

How To Trade This Event Risk(Video)

Bullish USD Trade: 2Q GDP expands 2.2% or greater

  • Need to see red, five-minute candle following the release to consider a short EURUSD entry
  • If market reaction favors a sell trade, establish short with two position
  • Set stop at the near-by swing high/reasonable distance from cost; at least 1:1 risk-to-reward
  • Move stop to cost on remaining position once initial target is hit; place reasonable limit

Bearish USD Trade: Growth rate falls short of market forecast

  • Need green, five-minute candle to look at a long EURUSD position
  • Implement same strategy as the bullish USD trade, just in reverse

Potential Price Targets For The Rate Decision

Forex_Will_Stronger_2Q_GDP_Spark_a_USD_Breakout_Key_Levels_on_Tap_body_ScreenShot032.png, Will Stronger 2Q GDP Spark a USD Breakout? Key Levels on Tap
  • Close below 1.3340 (61.8% retracement) adds further confirmation a top is in place
  • Bearish divergence in RSI favors downside targets; prices to follow
  • Soft resistance/pivot: 1.3450 (August high)
  • Need a close below 61.8% retracement (1.3340) for larger downturn
  • Next support area: 1.3240 (78.6% expansion) to 1.3320 (50.0% retracement)

Impact that the preliminary GDP report has had on USD during the last quarter

Period

Data Released

Estimate

Actual

Pips Change

(1 Hour post event )

Pips Change

(End of Day post event)

1Q P 2013

05/30/2013 12:30 GMT

2.5%

2.4%

+75

+95

1Q 2013 Preliminary U.S. GDP

Forex_Will_Stronger_2Q_GDP_Spark_a_USD_Breakout_Key_Levels_on_Tap_body_ScreenShot030.png, Will Stronger 2Q GDP Spark a USD Breakout? Key Levels on Tap

The U.S. growth rate was revised lower, with GDP expanding 2.4% during the first three-months of the year, while personal consumption increased another 3.4% in the first quarter amid forecasts for a 3.3% print. The slower rate of growth dragged on the dollar, with the EURUSD climbing above the 1.3000 handle, and the reserve currency continued to lose ground during the North American trade as the pair ended the day at 1.3047.

--- 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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