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EUR/USD to Eye Former Support on Dismal U.S. 1Q GDP

EUR/USD to Eye Former Support on Dismal U.S. 1Q GDP

2014-06-25 07:00:00
David Song, Currency Strategist
Share:

- U.S. Final 1Q GDP Print to Show Another Downward Revision/Larger Contraction.

- 1.8% Decline Would Mark the Biggest Drop Since 1Q 2009 (-5.4%).

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

The final 1Q Gross Domestic Product (GDP) report may heighten the bearish sentiment surrounding the U.S. dollar as market participants anticipate another downward revision in the growth rate.

What’s Expected:

EUR/USD 1Q GDP

Why Is This Event Important:

A more meaningful decline in the growth rate may spark a bearish reaction in the greenback (bullish EUR/USD) as it gives the Federal Reserve greater scope to retain its highly accommodative policy stance, and the reserve currency may face additional headwinds throughout the summer months as central bank Chair Janet Yellen continues to endorse a dovish tone for monetary policy.

For LIVE SSI Updates Ahead of the U.S. GDP Print, Join DailyFX on Demand

Expectations: Bearish Argument/Scenario

Release

Expected

Actual

Building Permits (MoM) (MAY)

-0.9%

-6.4%

Housing Starts (MoM) (MAY)

-3.9%

-6.5%

ISM Manufacturing (MAY)

55.5

55.4

The ongoing slack in business outputs paired with the slowdown in housing activity may prompt a larger-than-expected decline in 1Q GDP, and a dismal print may generate a more meaningful rebound in the EUR/USD as the data drags on interest rate expectations.

Risk: Bearish Argument/Scenario

Release

Expected

Actual

Consumer Credit (APR)

$15.000B

$26.847B

Change in Non-Farm Payrolls (MAY)

215K

217K

Durable Goods Orders (APR)

-0.7%

0.8%

However, stronger job growth along with the pickup in private sector credit may have helped to limit the downturn in economic activity, and a positive development may generate a bullish outlook for the greenback as it puts increased pressure on the Fed to normalize monetary policy sooner rather than later.

How To Trade This Event Risk(Video)

Bearish USD Trade: U.S. 1Q GDP Contracts 1.8% or Greater

  • Need green, five-minute candle following the GDP print to consider a long EUR/USD trade
  • If market reaction favors a bearish dollar trade, long EUR/USD with two separate position
  • Place 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: Growth Rate Exceeds Market Expectations

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

Potential Price Targets For The Release

EUR/USD Daily

EUR/USD Daily Chart

Chart - Created Using FXCM Marketscope 2.0

  • Continues to Threaten Trendline Resistance; Bullish Breakout Brings Up June High (1.3676)
  • Interim Resistance: 1.3650 (78.6% expansion) to 1.3670 (61.8% retracement)
  • Interim Support: 1.3490 (50.0% retracement to 1.3500 Pivot

Read More:

Price & Time: Quarter-End A Catalyst For Volatility?

Crude Oil Volatility To Continue, Platinum Exposed To Strike Deal

Impact that U.S. GDP 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 F 2014

03/27/2014 12:30 GMT

2.7%

2.6%

+10

-18

4Q F U.S. Gross Domestic Product (GDP)

EUR/USD to Eye Former Support on Dismal U.S. 1Q GDP

The final 4Q GDP report showed an upward revision in the growth rate as the U.S. economy expanded an annualized 2.6% amid an initial forecast of 2.4%. The greenback struggled to hold its ground following the release as the EUR/USD climbed towards the 1.3775 region, but the dollar regained its footing during the North American trade, with the pair ending the day at 1.3739.

--- 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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