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The advanced GDP reading for the U.S. is expected to show a 1.5% contraction in the second quarter, with economists forecasting a 0.5% drop in personal consumption, and the slump in private demands may hamper the prospects for a sustainable recovery as businesses continue to scale back on employment and investments in an effort to weather the downturn in global trade.

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

What's Expected

Time of release: 07/31/2009 12:30 GMT, 08:30 EST
Primary Pair Impact : EURUSD

Expected: -1.5%

Previous: -5.5%


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


Period

Data Released

Estimate

Actual

Pips Change

(1 Hour post event )

Pips Change

(End of Day post event)

1Q - 2009

04/29/2009 12:30 GMT

-4.7%

-6.1%

-16

+22

4Q - 2008

01/30/2009 13:30 GMT

-5.5%

-3.8%

+54

-37



1Q2009 U.S. Gross Domestic Product

Economic activity in the U.S. fell at an annualized rate of 6.1% in the first quarter, led by a record drop in inventories, and conditions are likely to get worse as the nation faces its worst economic downturn in over half a century. The breakdown of the report showed business spending plunged 38% from the previous year, with firms cutting stockpiles of unsold goods at the fastest pace since recordkeeping began in 1947, and fears of a protracted recession may lead companies to scale back on production and employment throughout the year as the outlook for future growth remains bleak. Nevertheless, as the Obama Administration pledges $787B in public spending to jump-start the ailing economy, the expansion in monetary and fiscal policy should help to stem the downside risks for growth and inflation as policymakers anticipate the economy to emerge from the recession in the second half of the year.



4Q2008 U.S. Gross Domestic Product

7-30-09TTN-02


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.

7-07-09TTN-03

7-07-09TTN-04

How To Trade This Event Risk

The advanced GDP reading for the U.S. is expected to show a 1.5% contraction in the second quarter, with economists forecasting a 0.5% drop in personal consumption, and the slump in private demands may hamper the prospects for a sustainable recovery as businesses continue to scale back on employment and investments in an effort to weather the downturn in global trade. A report by the Commerce Department showed orders for durable goods plunged 2.5% in June, while the personal savings rate jumped to a 15-year high of 6.9% in May, and the downturn in domestic demands may continue to stoke fears of a protracted recession as private-sector consumption accounts for more than two-thirds of the economy. Moreover, the International Council of Shopping Center said chain-store sales slumped for the eleventh month in June as households faced a weakening labor market, and the bigger-than-expected drop in consumer confidence could translate into a slower recovery as banks continue to tighten lending standards. Meanwhile, the Fed's Beige Book said most parts of the nation saw ‘signs of stabilization' during June and July, along with a rise in ‘selective hiring' however, policymakers noted retail spending remained ‘sluggish,' with banks continuing to tighten credit for households and businesses across the seven districts. In addition, the central bank went onto say that service-based activity excluding financials were ‘largely negative,' while the ‘labor markets remain slack,' which ‘has virtually eliminated upward wage pressures,' and speculation for a slower recovery could weigh on the exchange rate as growth prospects remain subdued. However, as the FOMC expects the growth rate to contract at a slower pace throughout the remainder of the year and forecasts GDP to expand over the next two-years, expectations for a sustainable recovery may drive demands for the greenback as market participants project the central bank to tighten policy over the next 12 months. Credit Suisse overnight index swaps show investors are pricing a 75bp rate hike for the following year as the outlook for growth and inflation improve and the rise in the interest rate outlook suggests investors anticipate the MPC to maintain its currently policy as economic activity begins to stabilize. Nevertheless, as risk trends continue to dictate price action in the foreign exchange market, a rise in risk aversion could strengthen the U.S. dollar against its major counterparts as the reserve currency continues to benefit from safe haven flows.

Forecasts for a 1.5% drop in 2Q GDP favors a bearish outlook for the greenback but nevertheless, an enhanced growth report could set the stage for a long dollar trade as policymakers anticipate an economic recovery in the second-half of the year. Therefore, if the growth rate contracts 1.0% or less, we will look for a red, five-minute candle following the release to confirm a sell entry on two-lots of EUR/USD. Once these conditions are met, we will set our initial stop at the nearby swing high, or a reasonable distance taking volatility into account, and this risk will establish our 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 preserve our profits.

In contrast, the slump in domestic demands paired with tightening credit conditions across the nation could dampen the stimulatory efforts taken on by the government, and a dismal GDP report could drag on the exchange rate as investors weigh the outlook for a sustainable recovery. As a result, if GDP contracts 1.5% or greater from the first quarter, we will favor a bearish outlook for the greenback, and will follow the same strategy for a long euro-dollar trade as the long position mentioned above, just in reverse.

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