EURUSD: Trading The Advance 1Q U.S. GDP Report

By Michael Boutros, Currency StrategistDavid Song, Currency Analyst

Trading the News: U.S. Gross Domestic Product

What’s Expected:

Time of release: 0 4 /27/2012 1 2 :30 GMT, 8:30EDT

Primary Pair Impact: EURUSD

Expected: 2.5%

Previous: 3.0%

DailyFX Forecast: 2.5% to 2.8%

Why Is This Event Important:

The advanced GDP report is expected to show the world’s largest economy expanding at an annual rate of 2.5% in the first-quarter, and the slower rate of growth may encourage a bearish outlook for the U.S. dollar as Fed Chairman Ben Bernanke maintains a cautious outlook for the region. Indeed, the initial growth reading has had a tendency of falling short of market expectations in 2011, and a weaker-than-expected print could threaten the bearish formation in the EURUSD as market participants increase bets for another large-scale asset purchase program. However, as Fed officials anticipate to see a more robust recovery in 2012, a strong GDP figure could produce a sharp selloff in the euro-dollar as the pair continues to approach the apex of the descending triangle.

Recent Economic Developments

The Upside

Release

Expected

Actual

Advance Retail Sales (MAR)

0.3%

0.8%

Average Hourly Earnings (YoY) (MAR)

1.9%

2.1%

Personal Spending (FEB)

0.6%

0.8%

The Downside

Release

Expected

Actual

New Home Sales (MoM) (MAR)

1.9%

-7.1%

Existing Home Sales (MoM) (MAR)

0.5%

-2.6%

Change in Non-Farm Payrolls (MAR)

205K

120K

The resilience in private sector consumption paired with the rebound in wage growth may generate an above-forecast GDP print, and a positive development may push the EURUSD back towards 1.3000 as the bearish formation continues to take shape. However, the ongoing weakness in the housing market paired with the protracted recovery in employment continues to dampen the outlook for the world’s largest economy, and we may see the FOMC show an increased willingness to expand policy further should the growth report dampen expectations for a sustainable recovery. In turn, we may see the EURUSD threaten the bearish formation from earlier this year, and the pair may work its way back towards 1.3400 as market participants increase bets for QE3.

Potential Price Targets For The Release

A look at the encompassing structure sees theeuro trading within the confines of a broad descending channelformation dating back to August 29 th with the pair testing channel resistance todayat 1.3260. Subsequent ceilings are seen at trendline resistancedating back to the February highs (currently just shy of 1.33) andformer trendline support dating back to January 10 th 2011. Daily support rests with the 50-daymoving average at 1.32 backed by the 100-day moving average at1.3113 and the 1.30-figure. Our medium-term outlook remainsweighted to the downside with only a breach above the April highsat 1.3380 negating our bias.

The scalp chart shows the single currencytrading within the confines of an ascending channel formationdating back to April 15 th with the pair holding just above interimsupport at the 61.8% Fibonacci extension taken form the March14 th and April 16 th troughs at 1.3230. Subsequent intra-day supporttargets are seen at the 1.32-figure and the confluence of channelsupport and the 50% extension at 1.3185. A break below this levelshifts our focus lower with such a scenario eyeing support targetsat 1.3160, the 38.2% extension at 1.3140 and 1.3110. Topsideresistance stands at 1.3260 backed by the 78.6% extension at 1.3295and 1.3220. Should the print prompt a bullish dollar response lookto target downside levels with a break below the weekly low at1.3104 offering further conviction on our directionalbias.

How To Trade This Event Risk

Projections for a slower rate of growth casts a bearish outlookfor the greenback, but a positive development could pave the wayfor a long U.S. dollar trade as it dampens speculation for moreeasing. Therefore, if the growth rate expands 2.5% or greater inthe first-quarter, we will need to see a red, five-minute candlefollowing the release to establish a sell entry on two-lots ofEURUSD. Once these conditions are met, we will set the initial stopat the nearby swing high or a reasonable distance from the entry,and this risk will generate our first target. The second objectivewill be based on discretion, and we will move the stop on thesecond lot to cost once the first trade reaches its mark in aneffort to protect our winnings.

In contrast, the ‘depressed’ housing market paired with high unemployment may have had a large dampening effect on the real economy, and a dismal growth figure could spark a sharp selloff in the USD as it raises the scope for more quantitative easing. As a result, if the economy grows less than 2.5%, we will implement the same strategy for a long euro-dollar trade as the short position laid out above, just in the opposite direction.

Impact that U.S. GDP report has had on USD during the last quarter

Period

Data Released

Estimate

Actual

Pips Change

(1 Hour post event )

Pips Change

(End of Day post event)

4Q A 2011

1/27/2012 13:30 GMT

3.0%

2.8%

-6

+81

4Q 2011 Advanced U.S. GDP

The world’s largest economy grew an annualized 2.8% in the fourth-quarter after expanding 1.8% during the three-months through September, while personal consumption advanced 2.0% amid forecasts for a 2.4% print. The dismal GDP report dragged on market sentiment, which pushed the EURUSD below 1.3100, but the initial reaction was short-lived as the pair ended the day at 1.3213.

--- Written by David Song, Currency Analyst andMichael Boutros, Currency Strategist

To contact David, e-mail dsong@dailyfx.com. Followme on Twitter at @DavidJSong

To contact Michael email mboutros@dailyfx.comorfollow him on Twitter @MBForex.

To be added to David's e-mail distribution list,send an e-mail with subject line "Distribution List" todsong@dailyfx.com.

To be added to Michael’s email distributionlist, send an email with subject line “DistributionList” to mboutros@dailyfx.com

Questions? Comments? Join us in the DailyFX Forum

View the Expo Presentation on ‘Trading theNews’ For Additional Resources
DailyFX is the forex news and research arm of FXCM, Inc (NYSE: FXCM), which provides currency trading and brokerage services and is an advertiser on TheStreet websites. Any opinions, news, research, analyses, prices, or other information is provided as general market commentary, and does not constitute investment advice. Dailyfx will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on such information. Currency trading involves significant risk of loss. Individual authors may hold positions in the currencies discussed in the article.

Original Article: http://www.dailyfx.com/forex/fundamental/daily_briefing/daily_pieces/trading_news_reports/2012/04/26/EURUSD_Trading_the_Advance_1Q_U.S._GDP_Report.html

DailyFX is the forex news and research arm of FXCM (NYSE: FXCM), which provides currency trading and brokerage services and is an advertiser on TheStreet websites. Any opinions, news, research, analyses, prices, or other information is provided as general market commentary, and does not constitute investment advice. Dailyfx will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on such information. Currency trading involves significant risk of loss. Individual authors may hold positions in the currencies discussed in the article.

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