Monday, August 24, 2009

EUR/USD Trading U.S. Consumer Confidence Report


Consumer confidence in the U.S. is expected to improve in August, with economists forecasting the index to rise to 47.6 from 46.6 in July, and the rebound in household sentiment is likely to encourage an enhanced outlook for private-sector spending as policymakers anticipate economic activity to increase throughout the second-half of the year.

Trading the News: US Consumer Confidence

What’s Expected

Time of release: 08/25/2009 14:00 GMT, 10:00 EST
Primary Pair Impact : EURUSD

Expected: 47.6

Previous: 46.6

Effects of US Consumer Confidence has had on EURUSD for the past 2 months


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July 2009 US Consumer Confidence

Consumer sentiment in the U.S. fell more than expected in July, with the index slipping to 46.6 from 49.3 in June amid projections for a drop to 49.0, and the data reinforces a weakening outlook for private-sector consumption as households face a weakening labor market paired with tightening credit conditions. The breakdown of the report showed the gauge of current conditions weakening to 23.4 from 25.0 in the previous month, with the index for future expectations declining to 62.0 from 65.5, and fears of a slower recovery may continue to weigh on household confidence as the outlook for growth and inflation remains weak. As a result, the Fed is widely expected to hold the benchmark interest at the record-low going into the following year, and may expand the scope of its asset purchase program in an effort to foster a sustainable recovery.

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June 2009 US Consumer Confidence

U.S. consumer confidence unexpectedly weakened in June, with the index falling back to 49.3 from a revised reading of 54.8 in May, and the downturn in the labor market may continue to weigh on household sentiment as business scale back on production and employment in an effort to weather the slump in global trade. A deeper look at the report showed the index for future expectations slipped to 65.5 from 71.5 in the previous month, with the gauge of current conditions falling back to 24.8 from 29.7, and fears of a slower recovery may continue to weigh on the economic outlook going forward as the Federal Reserve forecasts unemployment to peak at 10% this year. At the same time, the drop in consumer confidence foreshadows a weakening outlook for household spending, and policymakers may take additional steps to stem the downside risks for growth and inflation in order to steer the economy out of recession.

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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.

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Consumer confidence in the U.S. is expected to improve in August, with economists forecasting the index to rise to 47.6 from 46.6 in July, and the rebound in household sentiment is likely to encourage an enhanced outlook for private-sector spending as policymakers anticipate economic activity to increase throughout the second-half of the year. The advanced GDP reading showed economic activity contracted at a slower pace in the second quarter, led by a surge in public spending, and the extraordinary efforts taken on by the government may continue to soften the landing of the world’s largest economy as the Federal Reserve holds the benchmark interest rate at the record-low and commits 1.75T in asset purchases to shore up the financial system. At the same time, a report by the Commerce Department showed retail spending unexpectedly fell 0.1% in July, while consumer credit weakened for the fifth month in June to mark the longest slump since recordkeeping began in 1991, and the data suggests households are turning increasingly pessimistic towards the economy as the Fed forecasts unemployment to peak at a high of 10% this year. Moreover, the University of Michigan consumer confidence index slipped to 63.2 in August from 66.0 in the previous month amid expectations for a rise to 69.0, while personal incomes tumbled at an annualized rate of 4.7% in June to post the biggest decline since the series began in 1960, and the weakening outlook for consumer spending may hamper the prospects for a sustainable recovery as private-sector spending accounts for more than two-thirds of the economy. Nevertheless, Fed Chairman Ben Bernanke held an improved outlook for the world’s largest economy during the summit at Jackson Hole, Wyoming, stating that the “prospects for a return to growth in the near term appear good” however, the central bank head went onto say that the recovery “is likely to be relatively slow at first, with unemployment declining only gradually from high levels,” and the rise in the jobless rate may continue to weigh on household sentiment as they face a weakening labor market paired with tightening credit conditions. Nevertheless, as risk trends continue to drive price action in the currency market, a rise in risk appetite is likely to weigh in the greenback as investors move into higher yielding assets.

Trading the given event risk favors a bullish forecast for the greenback as economists anticipate consumer confidence to improve in August, and price action following the release could set the stage for a short euro-dollar trade as the outlook for future growth improves. Therefore, if the index rises to 47.6 or higher, we will look for a red, five-minute candle following the release to confirm a sell entry on two-lots ofEUR/USD. Once these conditions are met, we will place 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 an effort to preserve our profits.


On the other hand, the unexpected drop in the U. of Michigan survey foreshadows a weakening outlook for consumer sentiment, and dismal consumer confidence report is likely to weigh on the exchange rate as the outlook for future growth remains highly uncertain. As a result if the index falls to 44.0 or lower in August, we will favor a bearish forecast for the greenback, and will follow the same strategy for a long euro-dollar trade as the short position mentioned above, just in reverse.


Written by David Song, Currency Analyst

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