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U.S. GDP on Tap, How Will the Dollar React?

Fri, Sep 26 2008, 06:55 GMT
by Daily FX Research Team

DailyFX

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

What’s Expected

Time of release: 09/26/2008 12:30 GMT, 08:30 EST

Primary Pair Impact : EURUSD

Expected: 3.3%

Previous: 3.3%

How To Trade This Event Risk

The final GDP reading for the second quarter is widely expected to hold steady at 3.3%, but any revisions to the growth figures may spark volatility for the U.S. dollar. The fiscal stimulus plan initiated earlier this year has clearly helped to support economic activity, and the government may be forced to inject another $700B into the economy as Treasury Secretary Henry Paulson and Fed Chairman Ben Bernanke continues to stress that the credit squeeze poses a grave threat to the economy going forward. The dynamic duo has reiterated the urgency for the government to take the precautionary steps to avoid further downturns in the financial sector, and noted that the repercussion effects of the credit crunch would ultimately be detrimental to the taxpayers in the long run if the government fails to act in a timely manner. Meanwhile, billionaire investor Warren Buffet has also voiced his support for the Treasury’s plan to wipe out the toxic debts, stating that ‘The Paulson Plan is absolutely necessary,’ and concluded that he is ‘betting on the Congress doing the right thing for the American public and passing this bill.’. On the other side of the spectrum, the U.S. Congress continued to weigh the implications of increasing the nation debt ceiling to $11.315 trillion from $10.615 trillion, raising such arguments that the government is not responsible for bailing out failing entities, and that it was not fair for the tax payers to take on the burden cause by financial institutions. The ongoing push and pull between the two sides suggests that the Congress is not ready to approve the $700B bill this week, but as the future outlook grows bleak, the government may be forced to act before the year is over. However, if the government fails to act, economic activity would deteriorate further, unemployment will rise higher, spending would dissipate, and would drag on the world’s largest economy for years to come.

The U.S. dollar has held its ground amid mounting uncertainties surrounding the outcome of the Treasury’s bailout plan, and an inline print should help to boost bullish sentiment for the greenback as fading growth concerns would allow the Fed to target upside risks for inflation going forward. As a result, we will look for a red, five-minute candle to confirm an entry on two lots of EURUSD. We will setup our initial stop at the nearby swing high (or reasonable distance), and this risk will determine our first target. Our second target will be based on discretion, and we will move the stop on the second lot to breakeven when the first trade reaches its target in order to preserve our profits.

On the other hand, a downward revision would only add to growth concerns for the U.S. economy, and may led the central bank to lower the benchmark interest rate as growth prospects turn bleak. Therefore, we will follow the same strategy for a short as the long above, just in reverse.

Published on  Fri, Sep 26 2008, 07:01 GMT