Trading the News: U.S. Consumer Confidence

What's Expected:

Time of release: 05/29/2012 14:00 GMT, 10:00 EDT

Primary Pair Impact: EURUSD

Expected: 69.5

Previous: 69.2

DailyFX Forecast: 69.0 to 70.5

Why Is This Event Important:

The Conference Board's Consumer Confidence survey is expected to increase to 69.5 from 69.2 in April and the rebound in household sentiment may spark a bullish reaction in the USD as it saps speculation for another round of quantitative easing. As the recovery gradually gathers pace, we've seen the Federal Reserve soften its dovish tone for monetary policy, and it sees as though the central bank is moving away from its easing cycle as the economy gets on a more sustainable path. In turn, we should see the FOMC carry its wait-and-see approach into the second-half of the year, and the committee may start to discuss a tentative exit strategy as the rise in growth heightens the outlook for inflation.

Recent Economic Developments

The Upside

Release

Expected

Actual

Advance Retail Sales (APR)

0.1%

0.1%

Personal Consumption (1Q A)

2.3%

2.9%

Consumer Credit (MAR)

$9.800B

$21.355B

The Downside

Release

Expected

Actual

Consumer Price Index (YoY) (APR)

2.3%

2.3%

Change in Non-Farm Payrolls (APR)

160K

115K

Average Hourly Earnings (YoY) (APR)

2.0%

1.8%

The ongoing expansion in consumer credit paired with the resilience in private sector consumption certainly bodes well for household confidence, and an above-forecast print could generate fresh 2012 lows in the EURUSD as the development curbs expectations for QE3. However, subdued wage growth paired with the ongoing weakness in employment may drag on consumer confidence, and a dismal report could fuel speculation for additional monetary support as Fed Chairman Ben Bernanke keeps the door open to expand the balance sheet further. In turn, we may see the EURUSD continue to carve out a short-term floor ahead of June, which should set the stage for a short-term correction as the single currency remains oversold.

Potential Price Targets For The Release

EURUSD_Trading_the_U.S._Consumer_Confidence_Report_body_ScreenShot003.png,

As the relative strength index bounces back from a low of 20, the EURUSD looks poised for a rebound, but the oscillator needs to get back above 30 to see a correction take shape. However, as the RSI co0ntinues to sit in oversold territory, we should see the 10-Day SMA (1.2657) continue to act as interim resistance, and we will look to sell rallies in the euro-dollar as the downward trend carried over from the previous year gathers pace. As the EURUSD carves out a lower low in May, we should ultimately see a higher low in the coming days, and the pair may track lower throughout the second-half of the year as the fundamental outlook for the euro-area turns increasingly bleak.

How To Trade This Event Risk

Forecasts for a rebound in household sentiment certainly instills a bullish outlook for the greenback, and the market reaction may pave the way for a long U.S. dollar trade as the data dampens the scope for QE3. Therefore, if the index advances to 69.5 or higher in May, we will need a red, five-minute candle subsequent to the release to establish a sell entry on two-lots of EURUSD. Once these conditions are met, we will set the initial stop at the nearby swing low or a reasonable distance from the entry, and this risk will generate our first objective. The second target will be based on discretion, and we will move the stop on the second lot to cost once the first trade reaches its mark in a n effort to protect our profits.

On the other hand, household may turn increasingly cautious towards the economy amid the ongoing slack in private sector activity, and a dismal confidence report could spark a sharp selloff in the reserve currency as market participants increase bets for more easing. As a result, if the report falls short of market expectations, 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 the U.S. Consumer Confidence survey has had on USD during the last month

Period

Data Released

Estimate

Actual

Pips Change

(1 Hour post event )

Pips Change

(End of Day post event)

APR 2012

4/24/2012 14:00 GMT

69.6

69.2

-35

-1

April 2012 U.S. Consumer Confidence

EURUSD_Trading_the_U.S._Consumer_Confidence_Report_body_ScreenShot002.png,

Household sentiment weakened in April, with the Conference Board's index falling back to 69.2 from a revised 69.5 the month prior, and it seems as though consumers are turning increasingly cautious towards the economy amid the protracted recovery in the labor market. The weaker-than-expected print sapped risk-taking behavior, which pushed the EURUSD back below the 1.3200 figure, but we saw the greenback consolidate throughout the North American trade as the pair closed at 1.3215.

--- Written by David Song, Currency Analyst

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

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