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Bearish EUR/USD Outlook Vulnerable to Dismal 4Q U.S. GDP Report

Bearish EUR/USD Outlook Vulnerable to Dismal 4Q U.S. GDP Report

David Song, Shuyang Ren,

- U.S. 4Q GDP to Expand 2.0%- Slowest Pace of Growth Since the Contraction in 1Q 2014.

- Personal Consumption to Grow 4.3% - Fastest Pace of Growt5h Since 1Q 2006.

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

A marked downward revision in the U.S. growth rate may generate a short-term rebound in EUR/USD should the preliminary 4Q Gross Domestic Product (GDP) report dampen bets for a mid-2015 Fed rate hike.

What’s Expected:

EUR/USD GDP

Click Here for the DailyFX Calendar

Why Is This Event Important:

Despite bets for higher borrowing-costs, further weakness in the core Personal Consumption Expenditure (PCE), the Fed’s preferred gauge for inflation, may push Chair Janet Yellen to endorse a wait-and-see approach and further delay the normalization cycle as the central bank struggles to achieve the 2% target for price growth.

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

Expectations: Bearish Argument/Scenario

Release

Expected

Actual

Consumer Confidence (FEB)

99.5

96.4

Advance Retail Sales (MoM) (JAN)

-0.4%

-0.8%

NFIB Small Business Optimism (JAN)

101.0

97.9

Waning household and business confidence along with the slowdown in private spending may drag on the growth rate, and a dismal print may spur a bullish reaction in EUR/USD as it limits the Fed’s scope to normalize monetary policy sooner rather than later.

Risk: Bullish Argument/Scenario

Release

Expected

Actual

Non-Farm Payrolls (JAN)

228K

257K

Average Hourly Earnings (YoY) (JAN)

1.9%

2.2%

Personal Income (DEC)

0.2%

0.3%

Nevertheless, the uptick in private wages paired with the ongoing improvement in the labor market may foster a better-than-expected GDP report, and bets for a stronger recovery may heighten the bullish sentiment surrounding the U.S. dollar as the Fed remains on course to remove the zero-interest rate policy (ZIRP) over the near to medium-term.

How To Trade This Event Risk(Video)

Bearish USD Trade: Growth Rate Narrows to 2.0% or Lower

  • 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: 4Q GDP Report Tops Market Expectations

  • 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 Chart

EUR/USD Daily Chart

Chart - Created Using FXCM Marketscope 2.0

  • Break of the triangle/wedge formation favors a continuation of the bearish trend and the approach to ‘sell-bounces’ in EUR/USD.
  • Interim Resistance: 1.1440 (23.6% retracement) to 1.1470 (78.6% expansion)
  • Interim Support: 1.1185 (23.6% expansion) to 1.1210 (61.8% retracement)

Read More:

USD/JPY Scalp Targets 119.64 Resistance Ahead of GDP

USDOLLAR Holds Range Lows; Engulfs Prior 9 Days

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

Period

Data Released

Estimate

Actual

Pips Change

(1 Hour post event )

Pips Change

(End of Day post event)

3Q P

2014

11/25/2014 13:30 GMT

3.3%

3.9%

+1

+47

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

EUR/USD Chart

The preliminary 3Q U.S. GDP report showed an unexpected upward revision in the growth rate, with the economy expanding an annualized 3.9% amid an initial forecast for a 3.5% clip. Personal Consumption also increased more than initially expected as the figure climbed 2.2% during the same period, while the core Personal Consumption Expenditure (PCE), the Fed’s preferred gauge for inflation, narrowed to an annualized 1.4% from 2.1% in the third-quarter. Despite the improved outlook for growth, the disinflationary environment may push the Fed to retain its highly accommodative policy stance for an extended period of time as it struggles to achieve the 2% target for inflation. The market reaction following the better-than-expected figures was short-lived as EUR/USD climbed back above the 1.2425 region to end the day at 1.2473.

--- 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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