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Trading News Report

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EUR/USD: Trading the Euro−Zone Unemployment Rate

Fri, Nov 28 2008, 05:55 GMT
by Daily FX Research Team

FXCM

Growth prospects for the Euro-Zone is expected to weaken further as market participants forecast the unemployment rate to increase to 7.6% from 7.5% in September. Economic activity has weakened considerably throughout the second half of the year as the economy slipped into a recession in the third quarter.

Trading the News: Euro-Zone Unemployment Rate

What’s Expected

Time of release: 11/28/2008 10:00 GMT, 05:00 EST

Primary Pair Impact : EURUSD

Expected: 7.6%

Previous: 7.5%

Effect the Euro-Zone Unemployment Rate had over EURUSD for the past 3 months

September 2008 Euro-Zone Unemployment Rate

The jobless rate in the Euro-Zone held steady at 7.5% for the second straight month as widely expected, but may push higher over the following months as growth prospects deteriorate throughout the second half of the year. Economic activity contracted 0.2% in the second quarter as firms reduced spending, and may slip into a technical recession in the third quarter as market participants expect growth to contract for the second consecutive quarter. Fading demands from the global economy paired with the downturn in the financial market has certainly stoked fears for a worldwide recession, and business may cutback costs even further as credit conditions remain far from normal. The spillover effects of the credit crunch has certainly taken a toll on the real economy, and economic activity may remain subdued well into the next year as the major economies throughout Europe teeter on the brink of a recession.

August 2008 Euro-Zone Unemployment Rate

The Euro-Zone unemployment rate increased to 7.5% from a revised reading of 7.4% in July as the economy teeters on the brink of a recession. Employment opportunities have weakened considerably throughout the second half of the year as demands from home and abroad falter, and conditions may only get worse as economic activity weakens throughout Europe. Deteriorating fundamentals paired with the drastic slowdown in the global economy sparked fears that the euro-region could face a severe economic downturn as the spillover effects of the credit crunch continues to take a toll on the real economy. Despite the severity of the financial crisis, the European Central Bank is widely expected to hold the benchmark interest rate steady at 4.25% at tomorrow’s policy meeting, but may switch gears in the months ahead as falling oil prices curb the upside risks for inflation.

July 2008 Euro-Zone Unemployment Rate

The unemployment rate in the Euro-Zone held steady at 7.3% for the third consecutive month, which was inline with expectations. However, fading confidence among businesses paired with slowing demands from the global economy could raise the jobless rate over the coming months as the growth outlook turns dim. Business sentiment slipped to -0.33 from a revised reading of -0.20 in July as demands from home and abroad weakened throughout the second half of the year.
Retail spending fell 0.6% in June, followed by a 0.3% decline in industrial new orders, and economic activity may weaken further as trade deficit widened to 3.0B from 1.0B in August.
Despite the downturn in the economy, the European Central Bank continued to hold a neutral policy stance as they held the benchmark interest rate steady at a seven year high of 4.25% as policymakers carry out their one and only mandate to ensure price stability.

How To Trade This Event Risk

Growth prospects for the Euro-Zone is expected to weaken further as market participants forecast the unemployment rate to increase to 7.6% from 7.5% in September. Economic activity has weakened considerably throughout the second half of the year as the economy slipped into a recession in the third quarter, and firms may continue to cut payrolls as demands from home and abroad deteriorate. Manufacturing activity contracted for the sixth consecutive month in November to record its biggest monthly decline in nearly a decade as the PMI reading slipped to 36.2 from 41.1 in October. In addition, service-based activity in the Euro-Zone weakened as well, which led the composite PMI to reach a record low reading of 39.7 from 43.6 in the previous month. Moreover, industrial new orders plunged 3.9% in September, followed by a 1.5% decline in the prior month, while retail spending slipped 0.2% during the same period. The data suggests that employment opportunities will become increasingly scarce as economic activity falters, and the economy may face its worse recession in 15 years as firms continue to hold a dour outlook for growth. Business confidence plunged in November to reach its lowest level since 1993 as the index slipped to -2.14 from -1.34, while the economic outlook slipped to a 15 year low of 74.9 from 80.0 in October. Meanwhile, the European Central Bank is widely expected to lower the benchmark interest next week by 25bp to 3.00% from 3.25% as price pressures alleviate, but could be forced to ease policy further as economic activity deteriorates at a record pace. The interest rate outlook for the ECB could stoke increased selling pressures for the euro over the near-term as market participants expect policymakers to hold a dovish outlook well into the next year, but volatility may spike throughout the financial markets as traders in the U.S. are offline to celebrate Thanksgiving.

Trading the given event risk may not be as clear cut as some of our other trades as we expect trading volume in the currency market to fall as the U.S. observes a national holiday. Nevertheless, we would need a considerable improvement in the jobless rate to yield a bullish euro position for the scheduled event, and reading of 7.3% or lower would certainly set the stage for a long EURUSD trade. With an improved reading, we will look for a green, five-minute candle following the improved 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 risk will determine the target for the first lot. Our second target will be based purely on discretion, and to preserve our profits, we will move the stop on the second lot to breakeven once the first trade reaches its target.

On the other hand, a rise in the unemployment rate would only heighten growth fears for the economy, which is likely to trigger increased selling pressures for the euro. As a result, an inline print or a unemployment reading above 7.6% would favor a short EURUSD trade, and we will follow the same strategy as the long trade listed above, just in reverse.

Published on  Fri, Nov 28 2008, 08:08 GMT