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The advanced 2Q GDP reading for the Euro-Zone could weigh on the exchange rate as economists forecast the growth rate to contract 0.5% from the first quarter, and fears of a slower recovery could hamper the outlook for future policy as the European Central Bank anticipates price pressures to remain subdued throughout the second-half of the year.
Trading the News: Euro-Zone Gross Domestic Product
Time of release: 08/13/2009 9:00 GMT, 05:00 EST
Primary Pair Impact : EURUSD
Effect the Euro-Zone Gross Domestic Product report had over EURUSD for the past 2 months
(1 Hour post event )
(End of Day post event)
The advanced GDP reading for the Euro-Zone showed the economy contracted 1.5% in the fourth quarter to mark the biggest downturn since the series began in 1995, while the annual rate of growth slipped 1.2% from the previous year, which is the first full-year drop on record, and conditions are likely to get worse as the International Monetary Fund forecasts economic activity to contract 2.0% in 2009. As the region faces its first recession in over a decade, fears of a deepening downturn may lead policymakers to take further steps to shore up the economy, and the European Central Bank is expected to lower the benchmark interest rate by another 50bp to a record-low of 1.50% as the outlook for growth and inflation falter. Meanwhile, as the overnight rate falls close to zero, the Governing Council may look beyond the interest rate to manage monetary policy, and is likely to adopt unconventional measures to stimulate the economy.
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:
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.
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 advanced 2Q GDP reading for the Euro-Zone could weigh on the exchange rate as economists forecast the growth rate to contract 0.5% from the first quarter, and fears of a slower recovery could hamper the outlook for future policy as the European Central Bank anticipates price pressures to remain subdued throughout the second-half of the year. A report by the European Union showed retail sales unexpectedly fell 0.2% in June as households faced a weakening labor market, while the jobless rate increased to a 10-year high of 9.4% in May as businesses continued to scale back on production and employment in an effort to weather the downturn in global trade. As a result, ECB President Jean-Claude Trichet warned mounting job losses could hamper the prospects for an economic recovery, and the central bank head continued to hold a caution tone as policymakers forecast economic activity to contract at an annual pace of 4.6% this year. At the same time, consumer prices fell 0.1% in June from the previous year to mark the first annual decline since recordkeeping began in 1996, while the CPI estimate slumped 0.6% in July, and the downturn in the inflation outlook may lead the ECB to take additional steps to stimulate the ailing economy as they maintain their one and only mandate to ensure price stability. However, as President Trichet anticipates the economy to recovery faster than initially expected and deems the ECB's approach to monetary policy as ‘appropriate,' the central bank may hold a neutral policy stance going forward. As a result, an enhanced growth reading is likely to encourage long-term expectations for higher interest rates as growth prospects improve, and the data could drive demands for the euro as market participants speculate the Governing Council to tighten policy over the next 12 months.
Trading the given event risk favors a bearish outlook for the single currency as the growth is anticipated to contract 0.5% in the second quarter but nevertheless, an enhanced GDP report could set the stage for a long euro trade as ECB maintains an improved outlook for future growth. Therefore if economic activity falls 0.1% or less during the three-months through June, we will look for a green, five-minute candle following the data to confirm a buy entry on two-lots of EUR/USD. Once these conditions are met, we will place our initial stop at the nearby swing low, or a reasonable distance taking volatility into account, and this risk will establish the first target. Our second objective will be based on discretion, and we will move the stop on the second lot to breakeven once the first trade reaches its target in order to lock-in our profits.
On the other hand, the downturn in employment paired with the slump in global trade may continue to hamper the prospects for future growth, and fears of a slower recovery could drag on the exchange rate as investors weigh the outlook for monetary policy. As a result, if GDP contracts 0.5% or more in the second quarter, we will hold a bearish outlook for the single-currency, and will follow the same setup for a short euro-dollar trade as the long position mentioned above, just in reverse.
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