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Improved U. of Michigan Confidence Survey to Curb USD Weakness

Improved U. of Michigan Confidence Survey to Curb USD Weakness

2017-03-17 10:00:00
David Song, Currency Strategist
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- U. of Michigan Confidence to Rebound to 97.0 in March.

- 12-Month Inflation Expectations Have Increased for Last Two Consecutive Months.

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

Trading the News: U. of Michigan Confidence

A rebound in the U. of Michigan Confidence survey may curb the recent weakness in the U.S. dollar as it encourages the Federal Open Market Committee (FOMC) to further normalize monetary policy over the coming months.

What’s Expected:

DailyFX Calendar

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Why Is This Event Important:

The fresh developments coming out of the Federal Open Market Committee (FOMC) appears to be dragging on interest-rate expectations as central bank officials continue to forecast a terminal fed funds rate close to 3.00%, and the greenback stands at risk of facing headwinds over the coming months especially as Chair Janet Yellen and Co. persistently warns ‘market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed, on balance.’ Nevertheless, a meaningful pickup in household sentiment may keep the FOMC on course to deliver additional rate hikes in 2017 as the central bank anticipates a ‘sustained return to 2 percent inflation.’

Expectations: Bullish Argument/Scenario

Release

Expected

Actual

Non-Farm Payrolls (FEB)

200K

235K

Average Hourly Earnings (YoY) (DEC)

2.8%

2.8%

Personal Income (JAN)

0.3%

0.4%

Signs of stronger wage growth accompanied by the ongoing improvement in the labor market may generate a positive development, and a marked rebound in household sentiment may spark a bullish reaction in the U.S. dollar as it puts increase pressure on the FOMC to normalize monetary policy sooner rather than later.

Risk: Bearish Argument/Scenario

Release

Expected

Actual

Consumer Price Index (YoY) (FEB)

2.7%

2.7%

Consumer Credit (JAN)

$17.250B

$8.794B

Gross Domestic Product (Annualized) (QoQ) (4Q P)

2.1%

1.9%

Nevertheless, higher costs paired with the slowdown in private-sector lending may drag on consumer confidence, and an unexpected decline in the U. of Michigan survey may drag on the greenback as it casts a weakened outlook for growth and inflation.

For More Updates, Join DailyFX Currency Analyst David Song for LIVE Analysis!

How To Trade This Event Risk(Video)

Bullish USD Trade: U. of Michigan Confidence Rebounds to 97.0 or Higher

  • Need a red, five-minute candle following the survey to consider a short EUR/USD position.
  • 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: Household Sentiment Continues to Wane

  • Need green, five-minute candle to favor a long EUR/USD position.
  • Implement same strategy as the bullish dollar trade, just in the opposite direction.

Potential Price Targets For The Release

EUR/USD Daily

EUR/USD Daily Chart

Chart - Created Using Trading View

  • EUR/USD appears to be making a more meaningful run at the 2017 high (1.0829) following the FOMC interest rate decision as the pair finally closes above the Fibonacci overlap around 1.0660 (50% expansion) to 1.0680 (78.6% expansion) with the next topside target coming in around 1.0780 (100% expansion) to 1.0790 (38.2% expansion).
  • Will keep a close eye on the Relative Strength Index (RSI) as it comes up against trendline resistance and threatens the bearish formation carried over from the previous year, but failure to break the series of lower-highs may undermine the recent recovery in the exchange rate especially as the European Central Bank (ECB) keeps the door open to further extend its quantitative easing (QE) program.
  • Interim Resistance: 1.0880 (61.8% expansion) to 1.0910 (38.2% expansion)
  • Interim Support: 1.0340 (2017-low) and 1.0370 (38.2% expansion)

Impact that the U. of Michigan surveyhas had on EUR/USD during the previous release

Period

Data Released

Estimate

Actual

Pips Change

(1 Hour post event )

Pips Change

(End of Day post event)

FEB

2017

02/10/2017 15:00 GMT

98.0

95.7

+2

+13

February 2017 U. of Michigan Confidence

EUR/USD 5-Minute

EUR/USD Chart

The U. of Michigan Confidence survey narrowed more-than-expected in February, with the figure slipping to 95.7 from 98.5 the month prior. Nevertheless, 12-month inflation expectations picked up for the second straight month, with the gauge advanced to an annualized 2.8% from 2.6% in January, but Fed officials appear to be in no rush to further normalize monetary policy as Chair Janet Yellen warns ‘inflation moved up over the past year, mainly because of the diminishing effects of the earlier declines in energy prices and import prices.’ The greenback struggled to hold its ground following the dismal print, with EUR/USD bouncing back from 1.0619 to end the day at 1.0635.

If you’re looking for trading ideas, check out our Trading Guides.

Read More:

Technical Weekly: USD/JPY 115.50-116.00 is a Clear Trading Barrier

S&P 500 Pulls Back to Support and Holds; Rip to New Highs or Consolidation Next?

What To Watch On The Breakdown In Oil & Gold As DXY Accelerates

PBOC, Fed Remain Key Drivers to Yuan

--- Written by David Song, Currency Analyst

To contact David, e-mail dsong@dailyfx.com. Follow me on Twitter at @DavidJSong.

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