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U.S. 1Q GDP to Trigger EUR/USD Rebound as Economy Contracts

U.S. 1Q GDP to Trigger EUR/USD Rebound as Economy Contracts

2014-05-29 07:00:00
David Song, Currency Strategist
Share:

- U.S. GDP to Contract for First Time Since 1Q 2011

- Personal Consumption to Increase More Than 3% for Second Straight Quarter

Trading the News: U.S. Gross Domestic Product (GDP)

The preliminary U.S. 1Q GDP report may spur a near-term rebound in the EUR/USD as the growth rate is expected to contract 0.5% during the first three-months of 2014.

What’s Expected:

EUR/USD 1Q GDP

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Why Is This Event Important:

Indeed, a marked downward revision may undermine the near-term rebound in the dollar as it gives the Federal Reserve greater scope to further delay its exit strategy, and the greenback may struggle to hold its ground ahead of the next policy meeting on June 18 should the data print drag on interest rate expectations.

Expectations: Bearish Argument/Scenario

Release

Expected

Actual

Consumer Price Index Core (YoY) (APR)

1.7%

1.8%

Average Hourly Earnings (YoY) (APR)

2.1%

1.9%

Personal Consumption Expenditure Core (YoY) (MAR)

1.2%

1.2%

Subdued wage growth paired with sticky inflation raises the risk of seeing a larger-than-expected contraction in the U.S. economy, and a dismal print may spark a rebound in the EUR/USD as the dampens the prospects for a stronger recovery in 2014.

Risk: Bullish Argument/Scenario

Release

Expected

Actual

Durable Goods Orders (APR)

-0.7%

0.8%

Change in Non-Farm Payrolls (APR)

218K

288K

Personal Spending (MAR)

0.6%

0.9%

Nevertheless, the resilience in private sector consumption paired with the ongoing improvement in the labor market may generate an upbeat GDP report, and a positive development may trigger fresh monthly lows in the EUR/USD as it raises the outlook for the U.S. economy.

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How To Trade This Event Risk(Video)

Bearish USD Trade: U.S. Economy Contracts 0.5% or Greater

  • Need to see green, five-minute candle following the release to consider a short dollar trade
  • If market reaction favors a bearish dollar trade, sell EUR/USD with two separate position
  • Set stop at the near-by swing low/reasonable distance from entry; look for at least 1:1 risk-to-reward
  • Move stop to entry on remaining position once initial target is hit; set reasonable limit

Bullish USD Trade: 1Q GDP Exceeds Market Forecast

  • Need red, five-minute candle to favor a short EUR/USD trade
  • Implement same setup as the bearish dollar trade, just in the opposite direction

Potential Price Targets For The Release

EUR/USD Daily

EUR/USD Daily Chart

Chart - Created Using FXCM Marketscope 2.0

  • February Advance at Risk on Break Below 78.6% Retracement (1.3580)
  • Interim Resistance: 1.3770 (38.2% expansion) to 1.3780 (38.2% retracement)
  • Interim Support: 1.3490 (50.0% retracement) to 1.3500 Pivot

Read More:

AUDNZD Testing 2014 Range Highs- 1.09 Key Resistance

Price & Time: USD Advance Getting Long in the Tooth?

Impact that the U.S. GDP report has had on EUR/USD during the last quarter

Period

Data Released

Estimate

Actual

Pips Change

(1 Hour post event )

Pips Change

(End of Day post event)

4Q P

2013

02/28/2014 13:30 GMT

2.5%

2.4%

4Q P 2013 U.S. GDP

EUR/USD Chart

The preliminary 4Q GDP showed a downward revision in the growth rate, with the world’s largest economy expanding an annualized 2.4% during the last three-months of 2014, while Personal Consumption increased 2.6% during the same period after climbing 2.0% in the third-quarter. Despite the weaker-than-expected GDP print, the EUR/USD failed to hold above the 1.3800 handle during the U.S. trade, with the pair ending the day at 1.3798.

--- 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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