Trading the News: U.S. GDP

Why Is This Event Important:

Economic activity in the U.S. is expected to expand at a faster pace during the last three-months of 2010, and the rise in GDP could lead the greenback to recoup the losses from earlier this week as the outlook for growth and inflation improves. As the near-term rally in the EUR/USD appears to be overbought, the advanced growth report could serve as a catalyst to spark a correction in the exchange rate, and the pair could break out of the upward trend from earlier this month as growth in the world's largest economy outpaces the recovery in Europe.

What's Expected:

Time of release:01/28/2011 13:30 GMT, 8:30 EST

Primary Pair Impact :EURUSD

Expected: 3.5%

Previous: 2.6%

DailyFX Forecast: 3.2% to 3.7%

Will This Be Market Moving (Scenarios):

The advanced 4Q GDP report is anticipated to show the world's largest economy growing at an annualized pace of 3.5% during the last-three months of 2010, while personal consumption is forecasted to increase 4.0% during the same period, which would be the fastest pace of expansion since the first quarter of 2006. However, as the Fed continues to cast doubts for a sustainable recovery, we would certainly need a marked expansion in the fourth-quarter to see a sharp rebound in the U.S. dollar, and an in-line print could produce a mixed reaction in the greenback as the fundamental outlook remains clouded with high uncertainty.

The Upside

As retail spending expands throughout the second-half of 2010, with businesses increasing their rate of production, the rise in private sector activity could generate a larger-than-expected rise in GDP as consumption remains one of the leading drivers of growth. In turn, a marked expansion in the growth rate could lead the EUR/USD to pare the advance from earlier this week, and push the exchange rate back down towards 1.3500, the 50.0% Fibonacci retracement from the 2009 high to the 2010 low.

The Downside

However, as households cope with a depressed housing market paired with the ongoing weakness in employment, the substantial margin of slack within the real economy certainly leaves the door open for a dismal GDP report. Accordingly, a tepid pace of economic expansion in the fourth-quarter could spark a bearish reaction in the greenback, and the EUR/USD may continue to retrace the decline from back in November as the outlook for growth and inflation remains subdued.

How To Trade This Event Risk

Expectations for a faster pace of growth reinforces an bullish outlook for the greenback, and market reaction following the release could set the stage for a long U.S. dollar trade as the recovery in the world's largest economy gathers pace. Therefore, if the growth rate expands 3.5% or greater during the last three-months of 2010, we will need a red, five-minute candle subsequent to the data to establish a sell entry on two-lots of EUR/USD. Once these conditions are fulfilled, we will set the initial stop at the nearby swing high or a reasonable distance after taking market volatility into account, and this risk will establish our first target. The second objective will be based on discretion, and we will move the stop on the second lot to cost once the first trade reach its mark in an effort to protect our profits.

On the other hand, the ongoing weakness in the labor market paired with the slack in housing could lead to a dismal GDP report, and a slower-than-expected expansion in the growth rate could spark a sharp selloff in the greenback as the Fed casts doubts for a sustainable recovery. As a result, if the economy expands less than 3.0%, we will implement the same strategy for a long euro-dollar trade as the short position laid out above, just in reverse.

Potential Price Targets For The Release

EURUSD_Trading_the_Advanced_U.S._4Q_GDP_Report_body_ScreenShot038.png,

Impact that U.S. GDP 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)

Nov 2010

10/29/2010 12:30 GMT

2.0%

2.0%

+42

+70

3Q 2010 U.S. GDP

Economic activity in the U.S. expanded at an annualized pace of 2.0% in the third-quarter, which was largely in-line with market expectations, while personal consumption advanced 2.6% during the same period to mark the fastest pace of growth since 2006. At the same time, the core personal consumption expenditure index, which gauges household spending after excluding food and energy, increased 0.8% amid forecasts for a 1.0% expansion, while the GDP price index unexpectedly advanced 1.9% versus projections for a 1.8% rise. Despite the positive outcome, the U.S. dollar sharply sold off against its major counterparts as the data sparked a rise in risk appetite, with the EUR/USD bouncing back from 1.3846 immediately following the release.

EURUSD_Trading_the_Advanced_U.S._4Q_GDP_Report_body_ScreenShot037.png,

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To discuss this report contact David Song, Currency Analyst: dsong@fxcm.com

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