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USD Weakness to Persist on Dismal U. of Michigan Confidence Survey

USD Weakness to Persist on Dismal U. of Michigan Confidence Survey

David Song, Strategist

- Preliminary U. of Michigan Confidence Survey to Hold Steady at 95.9 in May.

- Household Sentiment to Retain the Second-Highest Print for 2015.

For more updates, sign up for David's e-mail distribution list.

Trading the News: U. of Michigan Confidence

The U. of Michigan Confidence survey is expected to hold steady at 95.9 in May, but a marked deviation from market expectations may spur increased volatility in the dollar as the recent series of weak U.S. data prints dampens speculation for a mid-2015 Fed rate hike.

What’s Expected:

EUR/USD U. of Michigan Confidence

Click Here for the DailyFX Calendar

Why Is This Event Important:

The persistent slack in the real economy may encourage a growing number of central bank officials to adopt a more dovish tone for monetary policy, and the dollar remains at risk of facing additional headwinds over the near-term as the market participants push back bets for the Fed liftoff.

Expectations: Bullish Argument/Scenario

Release

Expected

Actual

NFIB Small Business Optimism (APR)

96.0

96.9

Unemployment Rate (APR)

5.4%

5.4%

ISM Non-Manufacturing (APR)

56.2

57.8

The Fed’s projection for a faster rate of growth in the second-quarter may encourage a pickup in household sentiment, and a positive U. of Michigan survey may heighten the appeal of the greenback as the Federal Open Market Committee (FOMC) remains on course to remove its zero-interest rate policy (ZIRP).

Risk: Bearish Argument/Scenario

Release

Expected

Actual

Advance Retail Sales (MoM) (APR)

0.2%

0.0%

Average Hourly Earnings (APR)

2.3%

2.2%

Gross Domestic Product (Annualized) (QoQ) (1Q A)

1.0%

0.2%

Nevertheless, fears of a slowing recovery paired with the ongoing weakness in private-sector consumption may generate a downturn in consumer confidence, and a dismal print may trigger a further decline in the dollar as it drags on interest rate expectations.

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How To Trade This Event Risk(Video)

Bullish USD Trade: U. of Michigan Confidence Prints at 95.9 or Higher

  • Need to see red, five-minute candle following the release to consider a short trade on EUR/USD.
  • If market reaction favors a bullish dollar trade, sell EUR/USD with two separate position.
  • Set stop at the near-by swing high/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.

Bearish USD Trade: Household Sentiment Fails to Meet Market Expectations

  • Need green, five-minute candle to favor a long EUR/USD trade.
  • Implement same setup as the bullish 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

  • Ongoing closes above the 1.1300 handle (78.6% retracement) raises the risk for EUR/USD to retrace the decline from the February high especially as the bullish RSI momentum remains in play.
  • DailyFX Speculative Sentiment Index (SSI) shows the retail crowd remains net-short EUR/USD since April 9, with the ratio currently standing at -2.21.
  • Interim Resistance: 1.1520 (61.8% expansion) to 1.1532 (February high)
  • Interim Support: 1.0970 (38.2% expansion) to 1.1000 (50% retracement)

Read More:

GBP/USD Continues Carve Bullish Pattern as Retain Crowd Remains Short

NZDJPY Rebound Testing Resistance- Scalps Target 89.50 Inflection Zone

Impact that the U. of Michigan 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)

APR P

2015

04/17/2015

14:00 GMT

94.0

95.9

+6

+26

April 2015 U. of Michigan Confidence

EUR/USD Chart

The U. of Michigan Confidence survey advanced to 95.9 from 93.0 in March to mark the second-highest print for 2015. Despite the uptick in household confidence, 12-month inflation expectations slowed to an annualized 2.5% from 3.0% during the same period, and the ongoing slack in the real economy may push the Federal Reserve to further delay its normalization cycle as it struggles to achieve the 2% target for price growth. Despite the larger-than-expected pickup in household sentiment, the greenback struggled to hold its ground following the initial market reaction, with EUR/USD climbing back above the 1.0775 region to end the day at 1.0798.

--- 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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