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EUR/USD Pullback to Gather Pace on Upbeat 1Q GDP Report

EUR/USD Pullback to Gather Pace on Upbeat 1Q GDP Report

David Song, Shuyang Ren,

- U.S. 1Q GDP to Contract Annualized 0.2%- First Decline Since 1Q 2014.

- Core PCE to Climb Annualized 0.8%- Slowest Since 4Q 2010.

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

Another upward revision to the 1Q U.S. Gross Domestic Product (GDP) report may boost the greenback’s appeal and spark a larger decline in EUR/USD as it fuels speculation for the Federal Open Market Committee (FOMC) to remove the zero-interest rate policy (ZIRP) at the September meeting.

What’s Expected:

EUR/USD 1Q US GDP

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Why Is This Event Important:

Even though the Fed remains on course to raise the benchmark interest rate in 2015, signs of a slower recovery raises the risk for a further delay in the normalization cycle as the central bank remains in no rush to switch gears.

Expectations: Bullish Argument/Scenario

ReleaseExpectedActual
Building Permits (MoM) (MAY)-3.5%11.8%
Advance Retail Sales (MoM) (MAY)1.2%1.2%
Construction Spending (MoM) (APR)0.8%2.2%

The pickup in household consumption paired with the expansion in building activity may generate a strong GDP report, and a positive development may boost interest rate expectations as the Fed prepares U.S. households and businesses for higher borrowing costs.

Risk: Bearish Argument/Scenario

ReleaseExpectedActual
Non-Defense Capital Goods Orders ex Aircrafts (MAY)0.5%0.3%
Consumer Price Index ex Food & Energy (YoY) (MAY)1.8%1.7%
Industrial Production (MoM) (MAY)0.2%-0.2%

However, slowing outputs along with the ongoing weakness in business investments may continue to drag on the real economy, and a dismal print may drag on the greenback as it dampens the likelihood for the Fed liftoff at the September 17 meeting.

How To Trade This Event Risk(Video)

Bullish USD Trade: U.S. Economy Contracts 0.2% or Less

  • Need to see red, five-minute candle following the GDP report to consider a short trade on EURUSD.
  • If market reaction favors a long dollar trade, sell EURUSD 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: GDP Report Falls Short of Market Expectations

  • Need green, five-minute candle to favor a long EURUSD trade.
  • Implement same setup as the bullish dollar trade, just in reverse.

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

Potential Price Targets For The Release

EURUSD Daily

EUR/USD Daily Chart

Chart - Created Using FXCM Marketscope 2.0

  • Lack of momentum to test the May high (1.1465) may highlight a lower-high in EUR/USD; break of the bullish RSI formation to provide conviction/confirmation for a further decline in the exchange rate.
  • DailyFX Speculative Sentiment Index (SSI) shows the retail crowd remains net-short EUR/USD since March 9, with the ratio holding near extremes as it sits at -2.12.
  • Interim Resistance: 1.1510 (61.8% expansion) to 1.1532 (February high)
  • Interim Support: 1.0970 (38.2% expansion) to 1.1000 (50% retracement)

Read More:

USDOLLAR Breakout Gathers Pace as Fed’s Powell Endorses Sept. Liftoff

GBPUSD Pullback to Offer Favorable Long Entries- 1.57 Key Support

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

PeriodData ReleasedEstimateActualPips ChangePips Change

4Q F

2014

03/27/2015 12:30 GMT2.4%2.2%+15+24

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

EUR/USD Chart

The final 4Q U.S. Gross Domestic Product (GDP) report fell short of market expectations as the economy grew at an annualized rate of 2.2% amid forecasts for an upward revision to 2.4%. In contrast, Personal Consumption was revised higher to 4.4% from an initial forecast of 4.2%, while the core Personal Consumption Expenditure (PCE), the Fed’s preferred gauge for inflation, held steady at an annualized 1.1% to mark the slowest pace of growth since 3Q 2013. Despite the ongoing slack in the real economy, the Fed may stay on course to normalize monetary policy in 2015 as the central bank anticipates a stronger recovery to emerge in the year ahead. The initial market reaction to the mixed batch of data was largely limited as EUR/USD held below the 1.0900 handle, with the pair largely consolidating throughout the North American session to the day at 1.0885.

--- 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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