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Dismal 1Q U.S. GDP Report to Fuel Larger EUR/USD Rebound

Dismal 1Q U.S. GDP Report to Fuel Larger EUR/USD Rebound

2015-05-29 08:00:00
David Song, Shuyang Ren,
Share:

- U.S. GDP Report to Show First Contraction in Growth Since 1Q 2014.

- Core Personal Consumption Expenditure (PCE) to Hold at Lowest Level Since 4Q 2010.

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

A marked downward revision in the preliminary 1Q U.S. Gross Domestic Product (GDP) report may drag on the greenback and spur a near-term rebound in EUR/USD as the Federal Reserve looks to carry its zero-interest rate policy into the second-half of 2015.

What’s Expected:

EUR/USD 1Q GDP

Click Here for the DailyFX Calendar

Why Is This Event Important:

Even though the Fed pledges to look past the economic weakness drive by transitory factors, a larger-than-expected contraction in the growth rate may spur a further delay in the central bank’s normalization cycle as it undermines expectations for a stronger recovery.

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

Expectations: Bearish Argument/Scenario

Release

Expected

Actual

Wholesale Trade Sales (MoM) (MAR)

0.5%

-0.2%

Trade Balance (MAR)

-$41.7B

-$51.4B

Advance Retail Sales (MoM) (MAR)

1.1%

0.9%

Waning demand from home and abroad may become a growing concern for the Fed amid the ongoing slack in the real economy, and a dismal GDP report may dampen the appeal of the greenback as it drags on interest rate expectations.

Risk: Bullish Argument/Scenario

Release

Expected

Actual

Consumer Credit (MAR)

$15.800B

$20.523B

Existing Home Sales (MAR)

3.1%

6.1%

Manufacturing Production (SIC) (MAR)

0.1%

0.1%

Nevertheless, increased business outputs paired with the expansion in private-sector credit may offer a better-than-expected GDP print, and prospects for a stronger recovery may spur a bullish reaction in the dollar as the Fed remains on course to remove the zero-interest rate policy (ZIRP) in 2015.

How To Trade This Event Risk(Video)

Bearish USD Trade: Growth Rate Contracts 0.9% or Greater

  • 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: 1Q GDP Report Exceeds Market Forecast

  • 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

EURUSD Daily

EUR/USD Daily Charts

Chart - Created Using FXCM Marketscope 2.0

  • Failure to preserve the near-term downward trending channel may generate a larger rebound in EUR/USD and spur a consolidation phase in the days ahead.
  • DailyFX Speculative Sentiment Index (SSI) shows the retail crowd remains net-short EUR/USD since March 9, with the ratio currently sitting at -1.66.
  • Interim Resistance: 1.1180 (23.6% expansion) to 1.1210 (61.8% retracement)
  • Interim Support: 1.0790 (50% expansion) to 1.0800 (23.6% expansion)

Read More:

USD/JPY Bullish Formation Favored Despite Overbought RSI Signal

AUD Resuming Downtrend Backed by Sentiment & Volume Analysis

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)

4Q P

2014

02/27/2015 13:30 GMT

2.0%

2.2%

+1

+47

4Q 2014 U.S. Gross Domestic Product (GDP)

EUR/USD Chart

Even though the preliminary 4Q U.S. GDP print was revised down to an annualized 2.2% from an initial forecast of 2.6%, the print still managed to exceed market expectations for a 2.0% rate of growth. At the same time, Personal Consumption was also revised down to 4.2% from 4.3%, while the core Personal Consumption Expenditure (PCE) remained unchanged at 1.1% during the same period. The better-than-expected GDP reading may keep the Fed on course to normalize monetary policy in 2015 as the central bank anticipates a stronger recovery in the year ahead. The greenback strengthened following the report, with EUR/USD slipping below the 1.1200 handle to end the North American session at 1.1189.

--- 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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