Upbeat U.S. GDP to Thwart EUR/USD Rebound; Bear-Flag in Focus
- U.S. 3Q GDP to Expand Annualized 2.5%- Fastest Pace of Growth Since 2Q 2015.
- Core PCE, Fed’s Preferred Gauge for Inflation, to Slow to Annualized 1.6%.
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Trading the News: U.S. Gross Domestic Product (GDP)
The U.S. economy is projected to grow an annualized 2.5% in the third-quarter of 2016, and a marked pickup in the Gross Domestic Product (GDP) may boost the appeal of the greenback and trigger a near-term decline in EUR/USD as it fuels speculation for an imminent Fed rate-hike.
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Why Is This Event Important:
It seems as though the Federal Open Market Committee (FOMC) is following a similar path to 2015 as a growing number of central bank officials endorse a December rate-hike, but the majority may continue to endorse a ‘gradual’ path in normalizing monetary policy as ‘survey-based measures of longer-run inflation expectations were little changed, on balance, while market-based measures of inflation compensation remained low.’ With that said, a marked slowdown in the core Personal Consumption Expenditure (PCE), the Fed’s preferred gauge for inflation, may spark a bearish reaction in the greenback as it drags on interest-rate expectations.
Expectations: Bullish Argument/Scenario
|Existing Home Sales (MoM) (SEP)||0.4%||3.2%|
|Advance Retail Sales (MoM) (SEP)||0.6%||0.6%|
|Consumer Credit (AUG)||$16.500B||$25.873B|
The pickup in household consumption accompanied by the expansion in private-sector credit may generate a better-than-expected GDP report, and a signs of a stronger recovery may fuel the near-term advance in the U.S. dollar amid the Fed remains on course to remove its highly accommodative policy stance.
Risk: Bearish Argument/Scenario
|Non-Defense Capital Goods Orders ex. Aircrafts (SEP P)||-0.1%||-1.2%|
|NFIB Small Business Optimism (SEP)||95.0||94.1|
|Non-Farm Payrolls (SEP)||172K||156K|
However, waning business confidence paired with the slowdown in employment may weigh on the growth rate, and a dismal development may push Fed officials to further reduce the long-run interest-rate forecast as the central bank remains ‘data dependent.’
How To Trade This Event Risk(Video)
Bullish USD Trade: U.S. Expands Annualized 2.5% or Greater
- Need red, five-minute candle following the release to favor a short position on EUR/USD.
- If market reaction favors a bullish dollar trade, sell EUR/USD 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 Fails to Meet Market Forecast
- Need a green, five-minute candle to favor a long EUR/USD trade.
- Implement same strategy as the bullish dollar trade, just in reverse.
Potential Price Targets For The Release
Chart - Created Using Trading View
- EUR/USD appears to be establishing a bear-flag formation as the broader outlook remains tilted to the downside, but a move back above 1.0940 (61.8% retracement) to 1.0970 (38.2% retracement) may spur a test of trendline resistance especially as the Relative Strength Index (RSI) comes off of oversold territory.
- Interim Resistance: 1.1090 (50% retracement) to 1.1110 (50% retracement)
- Interim Support: 1.0780 (100% expansion) to 1.0800 (23.6% retracement)
Check out the short-term technical levels that matter for NZD/USD heading into the report!
Impact that the U.S. GDP reporthas had on EUR/USD during the last quarter
|Period||Data Released||Estimate||Actual||Pips Change||Pips Change|
|07/29/2016 12:30 GMT||2.5%||1.2%||+48||+57|
2Q 2016 U.S. Gross Domestic Product (GDP)
Chart - Created Using Trading View
The 2Q U.S. Gross Domestic Product (GDP) report showed the growth rate increasing an annualized 1.2% following a revised 0.8% expansion during the first-three months of the year, while Personal Consumption climbed 4.2% during the same period amid forecasts for a 4.4% print. At the same time, the core Personal Consumption Expenditure (PCE), the Fed’s preferred gauge for inflation, narrowed to an annualized 1.7% from a revised 2.1%, and easing price pressures may push the Federal Open Market Committee (FOMC) to follow as similar path to 2015 as the central bank remains ‘data dependent.’ The greenback struggled to hold its ground following the weaker-than-expected GDP report, with EUR/USD climbing above the 1.1150 zone to end the day at 1.1166.]
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--- Written by David Song, Currency Analyst
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