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EUR/USD August Rally to Erode Further on Upbeat 2Q US GDP

EUR/USD August Rally to Erode Further on Upbeat 2Q US GDP

David Song, Shuyang,

- 2Q U.S. GDP to Increase Annualized 3.2%- Fastest Pace of Growth Since 3Q 2014.

- Personal Consumption to Pick Up for Second Consecutive Quarter.

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

An upward revision in the 2Q U.S. Gross Domestic Product (GDP) report may boost the appeal of the greenback and spark a larger pullback in EUR/USD as it fuels speculation for a September Fed rate hike.

What’s Expected:

EUR/USD August Rally to Erode Further on Upbeat 2Q US GDP

Click Here for the DailyFX Calendar

Why Is This Event Important:

The Fed may stay on course to normalize monetary policy in 2015 as the central bank still anticipates a stronger recovery to materialize over the coming months, and data prints encouraging an improved outlook for growth & inflation may spur a greater dissent within the committee as the economy gets on a more sustainable path.

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

Expectations: Bullish Argument/Scenario

Release

Expected

Actual

Existing Home Sales (MoM) (JUL)

-1.1%

2.0%

Advance Retail Sales (MoM) (JUL)

0.6%

0.6%

ISM Non-Manufacturing (JUL)

56.2

60.3

The expansion in service-based activity along with the pickup in household spending may generate a stronger-than-expected GDP print, and a positive development may boost interest rate expectations as Fed Chair Janet Yellen remains upbeat on the economy.

Risk: Bearish Argument/Scenario

Release

Expected

Actual

Building Permits (MoM) (JUL)

-8.0%

-16.3%

Non-Farm Payrolls (JUL)

225K

215K

Construction Spending (MoM) (JUN)

0.6%

0.1%

However, easing job growth paired with the slowdown in building activity may drag on growth rate, and signs of a slower recovery may spur a further delay of the Fed’s normalization cycle as the central bank struggles to achieve the 2% target for inflation.

How To Trade This Event Risk(Video)

Bullish USD Trade: Growth Rate Expands Annualized 3.2% or Greater

  • 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: 2Q 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.

Potential Price Targets For The Release

EURUSD Daily

EUR/USD Daily Chart

Chart - Created Using FXCM Marketscope 2.0

  • Near-term breakout in EUR/USD keeps the focus on the topside targets as the RSI retains the bullish momentum; will retail a constructive view along as the pair holds above former-resistance around 1.1180 (23.6% retracement) to 1.1210 (61.8% retracement).
  • DailyFX Speculative Sentiment Index (SSI) shows the retail crowd remains net-short EUR/USD since March 9, but the ratio continues to come off of recent extremes as it narrows to -1.76, with 36% of traders long.
  • Interim Resistance: 1.1760 (61.8% retracement) to 1.1810 (38.2% retracement)
  • Interim Support: Interim Support: 1.0790 (50% expansion) to 1.0800 (23.6% expansion)

Read More:

Scalping EURAUD Breakout- Pullback at Initial Support

AUD/USD Downside Targets in Focus Ahead of RBA September Meeting

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)

1Q P

2015

05/29/2015 12:30 GMT

-0.9%

-0.7%

-6

+6

1Q 2015 U.S. Gross Domestic Product (GDP)

EUR/USD Chart

The preliminary 1Q Gross Domestic Product (GDP) report a downward revision in the growth rate to reflect an annualized 0.7% contraction in the growth rate amid an initial forecast for a 0.2% expansion. At the same time, Personal Consumption also failed to meet market forecast as the figure unexpectedly slowed to 1.8% from an advance reading of 1.9%. Despite the dismal GDP reading, the Federal Reserve may stay on course to remove the zero-interest rate policy (ZIRP) as the central bank sees the economic slowdown largely driven by transitory/seasonal factors. The initial market reaction was short-lived, with EUR/USD largely consolidating between 1.0950 and 1.1000, with the pair ending the North American trade at 1.0982.

--- 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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