EUR/USD to Stage Larger Recovery on Dismal U.S. GDP, Dovish Yellen
- U.S. GDP to Expand More Than Annualized 1.0% for First Time Since 3Q 2015.
- Personal Consumption to Increase 4.2%- Fastest Pace of Growth Since 4Q 2014.
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Trading the News: U.S. Gross Domestic Product (GDP)
The preliminary 2Q U.S. Gross Domestic Product (GDP) report may instill a near-term bullish outlook for EUR/USD as the updated figures are anticipated to show a downward revision in the growth rate to an annualized 1.1% from an advance reading of 1.2%.
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Why Is This Event Important:
Signs of a slowing recovery may encourage Fed Chair Janet Yellen to endorse a wait-and-see approach for monetary policy, and fresh comments emanating from the Fed Economic Symposium in Jackson Hole, Wyoming may dampen the appeal of the greenback should the central bank head talk down speculation for an imminent rate-hike. However, hawkish remarks from Chair Yellen may boost interest-rate expectations and prop up the greenback especially as a growing number of central bank officials appear to favor higher borrowing-costs.
Expectations: Bearish Argument/Scenario
|Non-Farm Productivity (2Q P)||0.4%||-0.5%|
|Consumer Credit (JUN)||$16.000B||$12.320B|
|Trade Balance (JUN)||-$43.0B||-$44.5B|
The slowdown in private-sector lending accompanied by widening trade-deficit may generate a dismal GDP report, with the dollar at risk of facing near-term headwinds as Fed Funds Futures continue to highlight limited expectations for a 2016 Fed rate-hike.
Risk: Bullish Argument/Scenario
|Personal Spending (JUN)||0.3%||0.4%|
|Existing Home Sales (MoM) (JUN)||-0.9%||1.1%|
|Advance Retail Sales (MoM) (JUN)||0.1%||0.6%|
Nevertheless, stronger consumption paired with the resilience in the housing market may unexpectedly spur a faster rate of growth in the U.S, and an upward revision in the growth rate may trigger a bullish reaction in the greenback as it puts pressure on the Federal Open Market Committee (FOMC) to raise the benchmark interest rate sooner rather than later.
How To Trade This Event Risk(Video)
Bearish USD Trade: Durable Goods Orders Rebound 3.4% or Greater
- Need green, five-minute candle following the release to consider a long trade on EUR/USD.
- If market reaction favors a bearish dollar trade, buy EUR/USD 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: Demand for Large-Ticket Items Disappoints
- Need red, five-minute candle to favor a short EUR/USD trade.
- Implement same setup as the bearish dollar trade, just in reverse.
Potential Price Targets For The Release
- With EUR/USD carving a bullish Harami (inside-day) ahead of the key U.S. event risks, the pair stands at risk for a larger recovery as it preserves the upward trend carried over from the previous month, while a bull-flag formation appears to be taking shape on shorter-term timeframes.
- Key Resistance: 1.1760 (61.8% retracement) to 1.1810 (38.2% retracement)
- Key Support: Interim Support: 1.0380 (78.6% expansion) to 1.0410 (61.8% expansion)
Check out the short-term technical levels that matter for USD/JPY heading into the report!
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Impact that the U.S. GDP report has had on EUR/USD during the previous quarter
|Period||Data Released||Estimate||Actual||Pips Change||Pips Change|
|1Q 2016||05/27/2016 12:30 GMT||0.9%||0.8%||-21||-58|
Preliminary 1Q 2016 U.S. Gross Domestic Product (GDP)
The preliminary Gross Domestic Product (GDP) report showed the U.S. economy expanding an annualized 0.8% during the first three-months of 2016, while Personal Consumption increased 1.9% during the same period amid forecasts for a 2.1% print. At the same time, the core Personal Consumption Expenditure (PCE), the Fed’s preferred gauge for inflation, grew an annualized 2.1% to mark the fastest pace of growth since 2012. Despite the initial move higher in EUR/USD, the greenback gained ground following the sticky inflation reading, with EUR/USD slipping below the 1.1150 region to end the day at 1.1109.
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--- Written by David Song, Currency Analyst
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