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EUR/USD: Trading the Euro−Zone GDP Report

Thu, Feb 12 2009, 06:31 GMT
by Daily FX Research Team

DailyFX

The euro is likely to face increased selling pressures over the next 24 hours of trading as market participants forecast the advanced GDP reading for the Euro-Zone to show a 1.3% contraction in the fourth quarter. Economic activity throughout the region has weakened considerably as trade conditions continue to falter, and the outlook for future growth remains bleak as the International Monetary Fund forecasts a global recession for 2009.

Trading the News: Euro-Zone Gross Domestic Product

What’s Expected

Time of release: 02/13/2009 10:00 GMT, 05:00 EST

Primary Pair Impact : EURUSD

Expected: -1.3%

Previous: -0.2%

Effect the Euro-Zone Gross Domestic Product report had over EURUSD for the past 2 months

3Q 2008 Euro-Zone Gross Domestic Product

The Euro-Zone slipped into its first recession in 15-years as the advanced GDP reading for the third quarter showed that economy contracted another 0.2% from the previous quarter, which lowered the annual rate of growth to 0.7% from 1.4%.
Mounting growth fears paired with the fall in global commodity prices led the European Central Bank to lower the benchmark interest rate by 100bp over the last two-months to 3.25% after hold rates at a seven-year high of 4.25% throughout the third quarter, and the central bank is likely to ease policy further over the coming months as price pressures alleviate.
Nevertheless, as global trade conditions falter, economic activity throughout the region is likely to weaken further, and may lead policy makers to step up their efforts in the coming months in order to steer the economy out of a recession.

2Q 2008 Euro-Zone Gross Domestic Product

Economic activity in the Euro-Zone contracted for the first time in nearly a decade as mounting price pressures sapped purchasing power for households, while fading demands from the global economy pushed businesses to cutback on production and spending. The advanced growth reading for the second quarter showed that GDP fell 0.2% from the previous quarter, which lowered the annual rate of growth to 1.5% from 2.1%, and conditions are likely to get worse as the economy teeters on the brink of a recession. Higher energy costs have certainly take a toll on businesses as global trade conditions deteriorate, and reinforces ECB President Trichet’s outlook for lower growth as he expects economic activity to be ‘particularly weak’ throughout the third quarter. Despite the weakening outlook for growth, the central bank may keep rates on hold at a seven-year high of 4.25% as price growth remains well above the ECB’s 2% target for inflation.

What To Look For Before The Release

Bullish Scenario:

If we see substantially deeper available liquidity on the Bid side of the market, this tells us that major price providers in the market are looking to buy the Euro against the US Dollar. Considering that close to 60% of all FX market volume is cleared through just six top banks, we see it prudent to be on the same side of the trade as major institutions and will favor a bullish bias on EURUSD ahead of the data release.

Bearish Scenario:

If we see substantially deeper available liquidity on the Offer side of the market, this tells us that major price providers in the market are looking to sell the Euro against the US Dollar. Considering that close to 60% of all FX market volume is cleared through just six top banks, we see it prudent to be on the same side of the trade as major institutions and will favor a bearish bias on EURUSD ahead of the data release. 

How To Trade This Event Risk

The euro is likely to face increased selling pressures over the next 24 hours of trading as market participants forecast the advanced GDP reading for the Euro-Zone to show a 1.3% contraction in the fourth quarter. Economic activity throughout the region has weakened considerably as trade conditions continue to falter, and the outlook for future growth remains bleak as the International Monetary Fund forecasts a global recession for 2009. Fading demands from abroad pushed the trade deficit to -4.9B from a revised reading of -2.1B in October as exports fell at its fastest pace in eight-years, while industrial outputs fell at a record pace from the previous year. Fears of a deepening recession paired with financial uncertainties continued to drag on the economy as the European Commission reported a record drop in economic confidence, and conditions are likely to get worse as economists anticipate the euro-region to face its most severe economic downturn since World War II. In addition, the European Central Bank monthly report released this week also foreshadowed a deepening downturn in the 16-countries operating under the euro as the survey showed the outlook for inflation slip to 0.9% from an initial forecast of 2.2% in the fourth quarter, while participants project price growth to reach 1.6% in 2010 from a previous estimate of 2.0%. Meanwhile, growth forecasts for the year fell to -1.7% from 0.3, whereas the annual rate of growth is anticipated to reach 0.6% in 2010 from an initial estimate of 1.4%. As price pressures are anticipated to fall well below the central bank’s 2% target, . As price growth is expected to fall below the central bank’s 2% target, policy makers are likely to lower the benchmark interest further in March as they maintain their one and only mandate to ensure price stability. After leaving rates on hold during this month’s meeting, ECB President Trichet explicitly stated that there is a possibility for a 50bp rate cut next month, but went on to say that adopting a zero interest rate policy ‘at this stage’ is unlikely. As a result, expectations for lower borrowing costs is likely to drag on the euro, and as the central bank is scheduled to revise their growth and inflation forecasts for the year at next month’s policy meeting, signs of a deepening recession would certainly reinforce a bearish outlook for the single currency going forward.

Forecasts for a considerable drop in GDP clearly favors a bearish euro trade for the given event risk however, the extraordinary efforts taken on by the central bank and the governments across the region could have helped to mitigate the downturn in economy, and an enhanced growth reading could spark a rally in the single-currency. Therefore, if the release tops estimates or falls in line with expectations, we will look for a green, five-minute candle following the event to confirm a buy entry on two lots of EURUSD. We will place our initial stop at the nearby swing low (or reasonable distance taking volatility into account) and this risk will determine our first target. Our second target will be based 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.

Nevertheless, deteriorating fundamentals paired with instability in the financial markets continues to foreshadow a dour outlook for future growth, and a larger than expect drop in GDP could trigger a sell-off in the euro. As a result, a dismal growth reading (economic contraction of 1.5% or greater), we will look to short the EURUSD, and will follow the same strategy as the long position mentioned above, just in reverse.

Published on  Fri, Feb 13 2009, 06:20 GMT