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Dismal 4Q U.S. GDP Report to Fuel EUR/USD Rebound

Dismal 4Q U.S. GDP Report to Fuel EUR/USD Rebound

David Song, Shuyang Ren,

- 4Q U.S. GDP to Increase Annualized 0.4%- Slowest Since the Contraction in 1Q 2014.

- Core Personal Consumption Expenditure (PCE) to Expand 1.5% in January- Highest Since October 2014.

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

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

The preliminary U.S. 4Q Gross Domestic Product (GDP) report may produce headwinds for the greenback and spark a near-term a rebound in EUR/USD should the report highlight a slowing recovery in the world’s largest economy.

What’s Expected:

EUR/USD 4Q GDP

Click Here for the DailyFX Calendar

Why Is This Event Important:

Even though the U.S. approaches ‘full-employment,’ a marked downward revision in the growth rate may undermine Fed expectations for a ‘consumer-led’ recovery, and the central bank may largely endorse a wait-and-see approach throughout 2016 in an effort to mitigate the downside risks surrounding the region.

Expectations: Bearish Argument/Scenario

Release

Expected

Actual

Markit Purchasing Manager Index- Services (FEB P)

53.5

49.8

ISM Non-Manufacturing (JAN)

55.1

53.5

ISM Manufacturing (JAN)

48.4

48.2

Easing outputs accompanied by the slowdown in service-based activity may lead to a dismal GDP report, and a greater risk of a recession may generate a selloff in the greenback as market participants push out bets for the next Fed rate-hike.

Risk: Bullish Argument/Scenario

Release

Expected

Actual

Durable Goods Orders (JAN)

2.9%

4.9%

Advance Retail Sales (MoM) (JAN)

0.1%

0.2%

Consumer Credit (DEC)

$16.000B

$21.267B

Nevertheless, the pickup in private-sector consumption may generate a better-than-expected GDP print as it remains one of the leading drivers of growth, and signs of a more meaningful recovery may boost the appeal of the greenback as it puts increased pressure on the Fed to implement higher borrowing-costs over the coming months.

How To Trade This Event Risk(Video)

Bearish USD Trade: 4Q GDP Slows to Annualized 0.4% 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 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: Growth, Inflation Top 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.

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Potential Price Targets For The Release

EURUSD Daily

EUR/USD Daily Chart

Chart - Created Using FXCM Marketscope 2.0

  • Even though the deviating paths for monetary policy fosters a long-term bearish outlook for EUR/USD, the pair may continue to retrace the decline from 2015 and work its way back towards the October high (1.1494) as it breaks out of the holding pattern from earlier this year.
  • Interim Resistance: 1.1510 (50% retracement) to 1.1520 (61.8% expansion)
  • Interim Support: Interim Support: 1.0380 (78.6% expansion) to 1.0410 (61.8% expansion)

Avoid the pitfalls of trading by steering clear of classic mistakes. Review these principles in the "Traits of Successful Traders" series.

EUR/USD SSI
  • The DailyFX Speculative Sentiment Index (SSI) shows retail FX has remains net-short EUR/USD since February 22, with the ratio marking an extreme reading earlier this month as it slipped to -2.00.
  • Despite the short-term bounce in EUR/USD, the ratio appears to be working its way back towards recent extremes as it downticks to -1.22, with 45% of traders now long.

Why and how do we use the SSI in trading? View our video and download the free indicator here

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)

3Q S

2015

11/24/2015 13:30 GMT

2.1%

2.1%

-3

-9

3Q 2015 U.S. Gross Domestic Product (GDP)

EUR/USD Chart

The preliminary 3Q Gross Domestic Product (GDP) report was larger in-line with market expectation as the economy grew an annualized 2.1% following an initial reading for a 1.5% clip. Nevertheless, the core Personal Consumption Expenditure (PCE), the Fed’s preferred gauge for inflation, crossed the wires at 1.3%, while Personal Consumption was revised down to 3.0% from an advance reading of 3.2%. With the Federal Reserve looking for a ‘consumer-led’ recovery in 2016, positive developments coming out of the U.S. economy may keep the central bank on course to further normalize monetary policy over the coming months especially as the region approaches ‘full-employment.’ Despite the mixed market reaction, EUR/USD struggled to hold its ground throughout the North American trade as the pair closed the day at 1.0641.

Read More:

EUR/USD Battle Lines Drawn- U.S. GDP to Spur Range-Break?

AUD/JPY Coiling at Key Support- Bearish Invalidation at 8200

USD/CAD Technical Analysis: On the Cusp of a Big Drop as Oil Stumbles?

USD/CHF Technical Analysis: Staying Short and Looking for More

Get our top trading opportunities of 2016 HERE

--- 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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