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Fed-Driven USD Rally at Risk on Dismal U.S. GDP Report

Fed-Driven USD Rally at Risk on Dismal U.S. GDP Report

David Song, Shuyang Ren,

- U.S. GDP to Expand Annualized 1.5% to Mark Six Straight Quarters of Growth.

- Core Personal Consumption Expenditure (PCE) to Slow for First Time Since 4Q 2014.

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

The advance 3Q U.S. Gross Domestic Product (GDP) report may produce near-term headwinds for the greenback and spark a rebound in EUR/USD as the world’s largest economy is expected to grow an annualized 1.5% after expanding 3.9% during the three-months through June.

What’s Expected:

EUR/USD US GDP

Click Here for the DailyFX Calendar

Why Is This Event Important:

Slower growth accompanied by a downtick in the core Personal Consumption Expenditure (PCE), the Fed’s preferred gauge for inflation, may encourage the central bank to further delay its normalization cycle, and the bullish sentiment surrounding the dollar may unravel amid the uncertainty surrounding the timing of the Fed liftoff.

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

Expectations: Bearish Argument/Scenario

Release

Expected

Actual

Advance Retail Sales (MoM) (SEP)

0.2%

0.1%

ISM Non-Manufacturing (SEP)

57.5

56.9

ISM Manufacturing (SEP)

50.6

50.2

The slowdown in private-sector consumption accompanied by waning business outputs may drag on the growth rate, and a weaker-than-expected GDP print may push the Federal Open Market Committee (FOMC) to further delay its normalization cycle in an effort to encourage a stronger recovery.

Risk: Bullish Argument/Scenario

Release

Expected

Actual

Existing Home Sales (MoM) (SEP)

1.5%

4.7%

Housing Starts (MoM) (SEP)

1.4%

6.5%

NFIB Small Business Optimism (SEP)

95.5

96.1

Nevertheless, improved confidence paired with the ongoing improvement in the housing market may encourage an improved outlook for the region, and a positive development may boost the appeal of the greenback as the Fed remains on course to remove the zero-interest rate policy (ZIRP).

How To Trade This Event Risk(Video)

Bearish USD Trade: 3Q GDP Slows to Annualized 1.5% 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 bearish 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.

Bearish USD Trade: U.S. Growth Rate Exceeds Market Expectations

  • Need red, five-minute candle to favor a short EURUSD trade.
  • Implement same setup as the bearish dollar trade, just in the opposite direction.

Potential Price Targets For The Release

EURUSD Daily

EUR/USD Daily Chart

Chart - Created Using FXCM Marketscope 2.0

  • EUR/USD has come up against the upward trend from earlier this year following the Federal Reserve interest rate decision, and a failure to retain the bullish pattern may highlight a resumption of the long-term downward trend amid the deviating paths for monetary policy.
  • DailyFX Speculative Sentiment Index (SSI) shows the retail crowd flipped net-long EUR/USD on October 28, but the ratio has narrowed over the last 24-hours of trade as it sits at +1.01, with 50% 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:

Price & Time: USDOLLAR – Quarterly Opening Range Break Ahead?

COT - Smallest JPY Speculative Short Position in 3 Years

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)

2Q A

2015

07/30/2015 12:30 GMT

2.5%

2.3%

-10

-11

2Q 2015 U.S. Gross Domestic Product (GDP)

EUR/USD Chart

The advance Gross Domestic Product (GDP) showed the U.S. economy expanding at a faster pace in the second-quarter, with the growth rate climbing an annualized 2.3% after expanding a revised 0.6% during the first three-months of 2015. Meanwhile, Personal Consumption and the core Personal Consumption Expenditure (PCE), the Fed’s preferred gauge for inflation, beat market expectations as the figures increased 2.9% and 1.8%, respectively. Despite the weaker-than-expected GDP print, signs of a more sustainable recovery may keep the Fed on course to normalize monetary policy in 2015 as Chair Janet Yellen remains upbeat on the economy. The greenback gained ground following the mixed prints, with EUR/USD working its way towards the 1.0900 handle, but the market reaction was short-lived as the pair ended the at 1.0929.

--- 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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