• Home ::
• Technical ::
• Market View ::
• Trading News Report

• Send
• Print
• Add To

Trading News Report

b2506b5c-7752-4155-ad13-90b300623cdb

13

0

EUR/USD: Trading the U.S. Gross Domestic Product (GDP) Report

Fri, Feb 27 2009, 05:56 GMT
by Daily FX Research Team

DailyFX

The preliminary GDP reading for the U.S. is likely to reinforce a dour outlook for the world’s largest economy as economists forecast economic activity to contract 5.4% in the fourth quarter. Furthermore, private-sector spending is expected to fall to -3.7% from an initial reading of -3.5%, and the outlook for future growth remains bleak as households continue to face a weakening labor market paired with fears of a deepening recession.

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

What’s Expected

Time of release: 02/27/2009 13:30 GMT, 08:30 EST

Primary Pair Impact : EURUSD

Expected: -5.4%

Previous: -3.8%

Impact the U.S. GDP has had on EURUSD over the last 2 quarters

3Q 2008 U.S. Gross Domestic Product

The Commerce Department revised the GDP reading for the third quarter down to -0.5% from an advanced reading of -0.3%, marking the biggest economic contraction since 2001, as private-sector spending slipped 3.7% from the previous quarter. The bigger than expected drop in private demands marked the largest contraction is nearly three decades, and the outlook for the U.S. remains bleak as consumer spending, which accounts for more than tow-thirds of the economy, falters. Meanwhile, a rise in exports helped to keep the economy afloat in the second quarter however, as global trade conditions deteriorate, economic activity is likely to weaken further in the months ahead. As market participants expect the world’s largest economy to face a deepening recession, the FOMC is likely to adopt a zero interest rate policy over the near-term in an effort to steer the economy out of a recession.

2Q 2008 U.S. Gross Domestic Product

The preliminary GDP reading for the U.S. was revised higher to 3.3% from an initial reading of 1.9% due to an unexpected increase in exports. Despite the improvement in trade, deteriorating fundamentals has certainly raised the downside growth risks for the world’s largest economy, and conditions may only get worse over the following months as home prices fall further. Tightening credit conditions paired with mounting inventories of unsold homes has spurred fears that the U.S. may face a recession in the second half of the year, and economic activity may remain subdued throughout the rest of the year as growth prospects deteriorate. In addition, the Fed minutes highlighted weakening demands from abroad due to the slowdown in the global economy, which could lead the central bank to lower the benchmark interest rate in the months ahead as the outlook for growth turns bleak.

What To Look For Before The Release

Traders with access to market depth information via the FXCM Active Trader Platform may use it to gauge the potency of the economic data release as well as to shed some light on the market’s directional bias. Increasing volume ahead of the announcement will telegraph likely follow-through behind whatever move is to materialize, while an imbalance in available liquidity on the Bid versus the Offer side of the market will tell us the direction major institutions are likely favoring ahead of the announcement:

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 preliminary GDP reading for the U.S. is likely to reinforce a dour outlook for the world’s largest economy as economists forecast economic activity to contract 5.4% in the fourth quarter. Furthermore, private-sector spending is expected to fall to -3.7% from an initial reading of -3.5%, and the outlook for future growth remains bleak as households continue to face a weakening labor market paired with fears of a deepening recession. Earlier this week, the Conference Board reported that consumer confidence fell to its lowest level since recordkeeping began in 1967, while a separate report by the Labor Department showed that continuing claims for jobless benefits surged to a record high of 4.99M in the first week of February. Moreover, personal spending dropped 1.0% in December after falling 0.8% in the previous month to mark its worst slump since 1961, and conditions are likely to get worse in the months ahead as credit conditions remain far from normal. The data continues to foreshadow the dire state of the economy as it faces its worst recession in over a quarter century, and the likelihood for improved growth remains doubtful as the International Monetary Fund expects the global economy to grow at an annual pace of 0.5% in 2009, which would be the lowest level of growth since World War II. As a result, the Federal Reserve pledged to ‘support the functioning of the financial markets and stimulate the economy’ by adopting unconventional measures, and went onto to say that the central bank will keep borrowing costs at the record-low for ‘some time’ as they expect the economic downturn to intensify during the first half of the year. The FOMC lowered their outlook for the economy as they expect growth to contact at an annual pace of 0.5% to 1.3%, and stated that ‘the economic recovery could be delayed and initially quite weak’ as the financial markets remain under stress. Nevertheless, as risk trends continue to drive price action in the foreign exchange market, safe-haven flows could lead the U.S. dollar to turn a blind eye to its own fundamentals as investors remain risk adverse.

Expectations for a 5.4% contraction in GDP clearly favors a bearish outlook for the U.S. dollar however, an enhanced growth reading would set the stage of a long dollar trade for the given event risk. Therefore, if GDP falls 4.9% or less, we will look for a red, five-minute candle following the release to generate a sell entry on two lots of EURUSD, and once these conditions are met, we will place our initial stop at the nearby swing high (or reasonable distance taking volatility into account), and this risk will determine our first target. 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.

On the other hand, as households continue to face mounting job losses paired with financial uncertainties, the outlook for improved growth remains bleak, and a dismal growth reading for the fourth quarter is likely to weigh on the greenback as market participants expect the economy to face its worst economic contraction in over a quarter century. As a result, a GDP reading of -5.4% or lower would lead us to short the greenback, and we will follow the same strategy for a long euro-dollar position as the short trade mentioned above, just in reverse.

Published on  Fri, Feb 27 2009, 06:05 GMT