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Trading News Report

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EUR/USD: Trading the U.S. 4Q GDP Report

Thu, Mar 26 2009, 05:55 GMT
by Daily FX Research Team

DailyFX

The final GDP reading for the U.S. is likely to reinforce a dour outlook for the world’s largest economy as economists forecast the annual rate of growth to contract 6.6% in the fourth quarter.

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

What’s Expected

Time of release: 03/26/2009 12:30 GMT, 08:30 EST

Primary Pair Impact : EURUSD

Expected: -6.6%

Previous: -6.2%

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

3Q 2008 U.S. Gross Domestic Product

The final GDP reading for the U.S. showed that the economy contracted 0.5% in the fourth quarter, which was the biggest drop in growth since 2001, and conditions are likely to get worse as economists expect the world’s largest economy to face its worst recession in over a quarter century. The breakdown of the report showed that personal consumption plunged 3.8% from the previous quarter to mark the biggest decline since 1980, and the outlook for private-spending remains bleak households face a weakening labor market paired with falling home prices. Mounting growth fears paired with increased turmoil in the banking sector led the Federal Reserve to lower the benchmark interest to a record low of 0-0.25% earlier this month, and the central bank is expected to hold borrowing costs near zero for sometime as policy makers employ all of their available tools in an effort to steer the economy out of a deepening recession.

2Q 2008 U.S. Gross Domestic Product

The annualized growth rate for the U.S. slipped to 2.8% from an initial estimate of 3.3% as household spending grew at a slower pace in the second quarter. A deeper look at the GDP report showed that personal consumption fell to 1.2% from a preliminary reading of 1.7%, and the data foreshadows a dour outlook for growth and inflation as private-sector spending accounts for more than two-thirds of the economy. As households face a weakening labor market paired with tightening credit conditions, Fed Chairman Ben Bernanke warned that the outlook for private consumption is ‘sluggish at best,’ and pushed Congress to pass a $700B bank rescue plan as he saw ‘grave threats’ for the financial system. As the world’s largest economy is expected to face a deepening economic downturn paired with increased turmoil in the financial sector, the FOMC is likely to lower the benchmark interest rate next month in an effort to mitigate the downside risks for growth and inflation.

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 final GDP reading for the U.S. is likely to reinforce a dour outlook for the world’s largest economy as economists forecast the annual rate of growth to contract 6.6% in the fourth quarter. Personal consumption, which is one of the biggest drivers of growth, is expected to fall 4.4% from the previous quarter as households face a weakening labor market paired with falling home prices, and economic activity is likely to deteriorate throughout the first half of the year as consumer confidence remains at its lowest level since records began in 1967. As firms struggle with fading demands from home and abroad, industrial outputs in February plunged 11% from the previous year to mark the biggest decline since 1975, while vehicle sales slipped to 9.1M during the month to reach its lowest level since 1981, and businesses may continue to cut back on production and employment as trade conditions falter. The data clearly highlights the dire state of the economy, and the outlook for growth and inflation remains bleak as market participants anticipate the U.S. to face its worst recession since World War II.
Meanwhile, after holding the benchmark interest rate at the record-low, the Federal Reserve announced that it would expand its balance sheet by up to $1.15T and would purchase nearly $300B in government debt in an effort to lower borrowing costs further, while the U.S. Treasury plans to purchase toxic assets in order to restore confidence in the financial markets, and the unprecedented steps taken on by the central bank and Secretary Geithner should help to soften the landing of the economy however, deteriorating fundamentals are likely to reinforce fears of a deepening economic downturn as the IMF and World Bank forecasts a global recession for 2009. Moreover, Fed Chairman Ben Bernanke spurred hopes for a speedy recovery during an interview earlier this month, stating that ‘the recession will probably end this year and the economy will expand in 2010’ if policy makers succeed in stabilizing the financial markets but nevertheless, as investors continue to weigh the viability of American institutions, a dismal growth reading could spark a rise in risk aversion, which would boost the appeal of the U.S. dollar as the reserve currency benefits from safe-haven flows.

Expectations for a downward revision in the GDP figure clearly favors a bearish forecast for the U.S. dollar however, an enhanced growth reading would certainly set the stage for a bullish dollar trade as market participants hold a dour outlook for growth and inflation. Therefore, if the final reading shows that annualized growth rate fell 6.2% or less in the fourth quarter, we will look for a red, five-minute candle to confirm a sell entry on two-lots of EURUSD. 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 an effort 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 private demands falter, economic activity is likely to fall further, and a dismal fourth quarter growth reading would certainly lead us to short the greenback as the world’s largest economy faces a deepening recession. As a result, an in-line print or a fall of more than 6.6% in GDP would lead us to sell the dollar following the release, and we will follow the same strategy for a long euro-dollar trade as the short position mentioned above, just in reverse.

Published on  Thu, Mar 26 2009, 06:10 GMT