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EUR/USD: Trading the Euro−Zone Consumer Confidence Report

Thu, Nov 27 2008, 06:52 GMT
by Daily FX Research Team

FXCM

Economic activity throughout the Euro-Zone may deteriorate further as economists expect consumer confidence to edge lower to -25 from a 14 year low of -24 in October. Growth fears have certainly intensified throughout the second half of the year as the economic growth contracted 0.2% for two consecutive quarters, and may face its worst recession in 15 years as demands falter.

Trading the News: Euro-Zone Consumer Confidence

What’s Expected

Time of release: 11/27/2008 10:00 GMT, 05:00 EST

Primary Pair Impact : EURUSD

Expected: -25

Previous: -24

Effect the Euro-Zone Consumer Confidence had over EURUSD for the past 3 months

October 2008 Euro-Zone Consumer Confidence

Euro-Zone consumer confidence plunged to -24 from -19 in September to reach a 14 year low. Mounting growth fears paired with the lack of stability in the financial market has clearly dragged on consumers, and conditions may only get worse over the near-term as the Euro-Zone heads into a recession. Concerns that the euro-region would face a severe downturn led the ECB, along with the Fed, to lower the benchmark interest rate by 50bp to .75% from 4.25%, and may continue to ease policy further over the coming months in order to stem further downturns in the economy. In addition, falling commodity prices have certainly helped to taper the upside risks for inflation, which should allow President Trichet to remain focused on growth as price pressures alleviate.

September 2008 Euro-Zone Consumer Confidence

Consumer sentiment among the 15 European nations operating under the euro held at -19 despite the recent pullback in oil prices. Easing price pressures have certainly helped to lower the inflation outlook for the Euro-Zone as the index slipped to 17 from 22 in August, but the ECB may continue to hold a hawkish outlook as the inflation rate remains above the central bank’s target. Meanwhile, the spillover effects of the U.S. credit crunch are clearly taking a toll on the global economy, and economic activity throughout Europe may deteriorate further as the credit market remains frozen. Despite the hawkish outlook held by the ECB President Trichet, the central bank has recognized the magnitude of the situation, and will offer increased lending to banks in order to address the liquidity constraints emerging from the crisis.

August 2008 Euro-Zone Consumer Confidence

Consumer confidence in the Euro-Zone unexpectedly ticked higher to -19 from a five year low of -20 in July, but may weaken further in the months ahead as inflation remains well above the European Central Bank’s 2% target. The rise in the cost of living continues to drag on consumers as retail spending fell for the eighth consecutive month in July, and conditions may only get worse as the economy teeters on the brink of a recession. The advanced GDP reading for the second quarter showed that economic growth contracted 0.2% from the previous quarter, and has certainly fueled growth fears among the 15 nations operating under the euro as growth prospects deteriorate throughout the second half of the year. Despite the downside risks to growth, the ECB held borrowing costs at a seven year high of 4.25% as policymakers continue to hold a hawkish outlook on inflation.

How To Trade This Event Risk

Economic activity throughout the Euro-Zone may deteriorate further as economists expect consumer confidence to edge lower to -25 from a 14 year low of -24 in October. Growth fears have certainly intensified throughout the second half of the year as the economic growth contracted 0.2% for two consecutive quarters, and may face its worst recession in 15 years as demands falter. Retail spending fell 0.2% in September, which lowered the annual rate to -1.6% from a revised reading of -1.5% in August, and as a result, manufacturing activity fell at a record pace in November. Manufacturing production in the Euro-Zone contracted for the sixth consecutive month in November, and recorded its biggest decline in nearly a decade as the PMI reading slipped to 36.2 from 41.1 in October. In addition, service-based activity weakened as well as the PMI reading for November slipped to 43.3 from 45.8 in the previous month. Meanwhile, the Organization for Economic Cooperation and Development (OECD) economic forecast showed that they expect real GDP growth in the euro region to contract 0.6% next year, while they project the unemployment rate to reach 9.0% by the fourth quarter of 2009. The data continues to reflect a dour outlook for the 15 nations operating under the euro, and may lead the European Central Bank to ease policy further over the coming months as growth prospects deteriorate. Moreover, ECB council member Ewald Nowotny continued to hold a dovish outlook as he focused on the downside risks to growth during a speech earlier this week, but went onto say that ‘it makes sense to be rather cautious and keep some of the firepower’ as many expect conditions to weaken further well throughout the next year. The comments suggests that the European policymakers may hold back from aggressively lowering the benchmark interest rate until further developments become apparent, which could boost buying pressures for the euro over the near-term. However, as risk sentiment continues to dictate price action in the forex market, buying pressures for the European currency may remain subdued as investors limit their appetite for risk.

As economists forecast consumer sentiment to deteriorate further, we would need a significant improvement in the confidence reading to yield a bullish euro trade for the scheduled event. Therefore, an improved reading of -11 or higher would set the stage for a long EURUSD trade, and we will look for a green, five-minute candle following the release to confirm an entry on two lots of the euro-dollar. We will place our initial stop at the nearby swing low (or reasonable distance), and this level of risk will determine the target for the first lot. Our second target will be based purely on discretion, and in order to preserve our profits, we will move the stop on the second lot to breakeven once the first trade reaches its target.

Meanwhile, deteriorating confidence among consumers would only heighten the downside risks to growth, which could stoke increased selling pressures for the euro. As a result, an inline print or a reading below -25 would favor a short EURUSD trade, and we will follow the same setup as the long trade mentioned above, just in reverse.

Published on  Thu, Nov 27 2008, 10:56 GMT