Dailyfx.com provides free FX news, Trading resources,and market analysis to the forex trading community.
Monday, 24 November 2008 11:12:46 GMT
Written by David Song, Currency Analyst
The growth outlook for the world�s largest economy may weaken further as economists forecast a downward revision in the third-quarter GDP reading to -0.5% from an initial reading of -0.3%. Economic activity has deteriorated considerable throughout the second half of the year as the manufacturing activity contracted for the third consecutive month in October to reach its lowest level since 1982.
Trading the News: U.S. Gross Domestic Product (Annualized)
What�s Expected
Time of release: 11/25/2008 13:30 GMT, 08:30 EST
Primary Pair Impact: EURUSD
Expected: -0.5%
Previous: -0.3%
Impact the GDP has had on EURUSD after the last 3 Quarters
2Q 2008 U.S. Gross Domestic Product
The preliminary GDP reading for the U.S. was revised higher to 3.3% from an initial reading of 1.9% due to an unexpected increase in exports. Despite the improvement in trade, deteriorating fundamentals has certainly raised the downside growth risks for the world�s largest economy, and conditions may only get worse over the following months as home prices fall further. Tightening credit conditions paired with mounting inventories of unsold homes has spurred fears that the U.S. may face a recession in the second half of the year, and economic activity may remain subdued throughout the rest of the year as growth prospects deteriorate. In addition, the Fed minutes highlighted weakening demands from abroad due to the slowdown in the global economy, which could lead the central bank to lower the benchmark interest rate in the months ahead as the outlook for growth turns bleak.
1Q 2008 U.S. Gross Domestic Product
Growth in the U.S. expanded 0.9% dispelling belief that the country was already in a recession. Although subtracting the build up in inventories the first quarter would have contracted. A 26.7% decline in investment in residential property demonstrates that the housing slump in the U.S. has continued and the economy recovery may dependent ion the stabilizing of the sector. Also, durable goods orders fell 6.1% as a weak dollar has failed to generate enough increased demand from overseas to offset the weakness domestically. However, the news was overshadowed by a pending FOMC rate decision. Therefore, ,we wouldn�t have traded the release as we were focused on the larger event risk. The central bank would cut rates by 25 bps as they tried to prevent the economy from slipping into a recession.
4Q 2007 U.S. Gross Domestic Product
U.S. GDP fell sharply to 0.6% in the fourth quarter from 3.9% the quarter prior. A monumental drop in gross private investment of 14.6% led by a 25.2 decline in residential, drag the economy to the brink of a recession. The economy also saw a precipitous drop in exports from 19.1% in the third quarter to 6.5%. The housing slump and credit crunch would lead to the FOMC cutting rates by 50 points latter in the day, bringing the benchmark rate to 3.00%. The central bank was dovish following that decision, as they see further weakness in the housing sector and credit conditions remaining difficult. The pending rate decision would leave us on the sidelines with the expected rate cut looming.
How To Trade This Event Risk
The growth outlook for the world�s largest economy may weaken further as economists forecast a downward revision in the third-quarter GDP reading to -0.5% from an initial reading of -0.3%. Economic activity has deteriorated considerable throughout the second half of the year as the manufacturing activity contracted for the third consecutive month in October to reach its lowest level since 1982, and conditions may only get worse over the coming months as demands falters. In fact, retail sales fell 2.8% in October to reach its lowest level since recordkeeping began in 1980, and consumers may cutback on spending even further as employment opportunities become increasingly scarce. The U.S. economy lost 240K jobs in October, which raised the unemployment rate to a 14 year high of 6.5%, and firms could be force to cut their workforce further well into the next year as the Fed expected the economy to contract through mid-2009. The FOMC Minutes from the October 29th meeting showed that policymakers expect economic activity to weaken further as credit conditions remain far from normal, and stated that lowering borrowing costs further �could well be appropriate at future meetings� as they anticipate economic activity to remain subdued over the near-term. In addition, the Fed noted that the central bank will �take whatever steps were necessary to support the recovery,� which suggests that the MPC will lower the benchmark interest rate again during the December 16th policy meeting in order to avoid a deep and severe recession. Fed Fund Futures are showing that investors forecast an 82% chance that the central bank will lower the interest rate by 50bp to 0.50%, while they see an 18% for a 75bp cut to 0.25%. Despite the expectations for a rate cut by the Fed, investors remain bullish against the U.S. dollar as risk sentiment continues to drive price action in the forex market, may reap the benefits of its safe haven status as carry demands falter.
Trading the given event risk may not be as clear cut as some of our other trades, but an unexpected improvement in growth could help to raise the interest rate outlook for the Fed, and may stoke increased buying pressures for the greenback. Therefore, an upward revision to 0.1% or better would certainly set the stage for a long dollar trade (short EURUSD), and we will look for a red, five-minute candle following the release to confirm an entry on two lots of the euro-dollar. Our initial stop will be set at the nearby swing high (or reasonable distance) and this risk will determine our first target. Our second target will be based on discretion(with a mind to support, and to preserve profit, we will move the stop on the second lot to break even when the first half of the trade reaches its target.
Meanwhile, a downward revision to GDP would only support the argument for a rate reduction by the FOMC, which would favor a bearish dollar trade following the release. As a result, a dismal reading would lead us to enter a long EURUSD trade, and we will follow the same setup as the short trade listed above, just in reverse.