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EUR/USD to Face Larger Rebound on Dismal 4Q U.S. GDP

EUR/USD to Face Larger Rebound on Dismal 4Q U.S. GDP

David Song, Shuyang Ren,

- U.S. Economy to Expand for Third Straight Quarter in 2014.

- Personal Consumption to Grow 4.0%- Would Mark Biggest Advance Since 4Q 2010.

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

The advance U.S. 4Q Gross Domestic Product (GDP) report may generate a larger rebound in EUR/USD should the fresh batch of data highlight a slowing recovery in the world’s largest economy.

What’s Expected:

EUR/USD GDP

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Why Is This Event Important:

Even though the Federal Open Market Committee (FOMC) is widely expected to raise the benchmark interest rate in mid-2015, a dismal GDP print may push the central bank to further delay its normalization cycle especially as it struggles to achieve the 2% target for inflation.

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Expectations: Bearish Argument/Scenario

ReleaseExpectedActual
Durable Goods Orders (DEC)0.3%-3.4%
Advance Retail Sales (MoM) (DEC)-0.1%-0.9%
Average Hourly Earnings (YoY) (DEC)2.2%1.7%

Subdued wages paired with the recent contraction in private consumption may generate a marked slowdown in economic activity, and a weaker-than-projected growth rate may undermine the bullish sentiment surrounding the dollar as it drags on interest rate expectations.

Risk: Bullish Argument/Scenario

ReleaseExpectedActual
Consumer Confidence (JAN)95.5102.9
NFIB Small Business Confidence (DEC)98.5100.4
Non-Farm Payrolls (DEC)240K252K

Nevertheless, improved confidence along with the ongoing recovery in the labor market may prompt a strong GDP figure, and a positive development may promote a further decline in EUR/USD amid the deviation in the policy outlook.

How To Trade This Event Risk(Video)

Bearish USD Trade: 4Q GDP Fails to Meet Market Expectations

  • Need to see green, five-minute candle following the GDP report to consider a long trade on EURUSD
  • If market reaction favors a short dollar trade, buy EURUSD 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: Growth Rate Expands 3.0% or Greater

  • Need red, five-minute candle to favor a short EURUSD trade
  • Implement same setup as the bearish dollar trade, just in reverse

Potential Price Targets For The Release

EUR/USD Daily

EUR/USD Daily Chart

Chart - Created Using FXCM Marketscope 2.0

  • Keeping a close eye on the RSI as it continues to flirt with the 30 level; rebound from oversold territory to favor a larger rebound for EUR/USD.
  • Interim Resistance: 1.1440 (23.6% retracement) to 1.1470 (78.6% expansion)
  • Interim Support: 1.1096 (January low) to 1.1100 pivot

Read More:

AUDNZD - Eyes On Rising Trend-line

Scalping EURAUD Breakout- Longs Favored Above 1.44

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

PeriodData ReleasedEstimateActualPips ChangePips Change

3Q A

2014

10/30/2014 12:30 GMT3.0%3.5%+12+19

3Q 2014 U.S. Gross Domestic Product (GDP)

The U.S. economy advanced more-than-expected in the third-quarter, with the growth rate expanding another annualized 3.5% following the 4.6% expansion during the three-months through June. At the same time, Personal Consumption climbed 1.8% during the same period amid forecasts for a 1.9% print, while the core Personal Consumption Expenditure (PCE) narrowed to 1.4% from 2.0% in the second-quarter. Despite the better-than-expected GDP print, the Fed appears to be in no rush to normalize monetary policy as it struggles to achieve the 2% target for inflation. The initial reaction in EUR/USD was short-lived as the pair snapped back from the 1.2550 region, with the pair ending the day at 1.2602.

--- Written by David Song, Currency Analyst and Shuyang Ren

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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