Economic activity in the Euro-Zone is expected to expand at a slower pace in the fourth quarter as economists forecast the growth rate to increase 0.3% after rising 0.4% during the three-months through September, and the data could instill a weakened outlook for the region as policy makers expect to see an uneven recovery this year.
[U][B]Trading the News: Euro-Zone Gross Domestic Product [/B][/U]
[U][B]What’s Expected[/B][/U]
Time of release: 11/13/2009 7:00 GMT, 02:00 EST
Primary Pair Impact : EURUSD
Expected: 0.3%
Previous: 0.4%
[U][B]Effect the Euro-Zone Gross Domestic Product report has had over EURUSD for the past 2 quarters[/B][/U]
[U]3Q 2009 German Gross Domestic Product[/U]
The Euro-Zone emerged from the recession in the third quarter driven by a rebound in exports, with the advanced GDP reading climbing 0.4% from the three-months through June amid expectations for a 0.5% expansion in the growth rate. Meanwhile, the annualized rate slid 4.1% from the previous after falling 4.0% in the second-quarter, the European Union’s statistics office in Luxembourg stated today. However, as government officials continue to see a risk for a protracted recovery, the European Central Bank is likely to maintain a dovish outlook for future policy in an effort to mitigate the risks for a double-dip recession. As a result, we are likely to see the Governing Council hold the benchmark interest rate at 1.00% going into the following year, but may look to normalize policy in 2010 as economic activity improves. [IMG]http://forums.babypips.com/export/story-images/2010/02/fundamental/daily_briefing/daily_pieces/trading_news_reports/02.11_TTN2.jpg[/IMG] [U]2Q 2009 German Gross Domestic Product[/U]
Economic activity in the Euro-Zone contracted less-than-expected in the second quarter as France and Germany returned to growth, with the growth rate slipping 0.1% after contracting 2.5% in the three-month period. GDP weakened for the fifth consecutive quarter, marking the longest contraction since record keeping began 14 years ago. Meanwhile, the European Central Bank kept borrowing costs at the record low 0.10% last week, while also offering unlimited cash to banks over 12 months, and launched its covered-bond operation to support the real economy. As a result, the Governing Council is likely to keep borrowing costs at its current level for an extended period of time as the central bank aims to balance the risks for growth and inflation. [IMG]http://forums.babypips.com/export/story-images/2010/02/fundamental/daily_briefing/daily_pieces/trading_news_reports/02.11_TTN3.jpg[/IMG] [B]What To Look For Before The Release[/B]
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:
[U][B]Bullish Scenario:[/B][/U]
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. [U][B]Bearish Scenario:[/B][/U]
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. [IMG]http://forums.babypips.com/export/story-images/2010/02/fundamental/daily_briefing/daily_pieces/trading_news_reports/00001_EUR.jpg[/IMG] [IMG]http://forums.babypips.com/export/story-images/2010/02/fundamental/daily_briefing/daily_pieces/trading_news_reports/00002_EUR.jpg[/IMG] [B]How To Trade This Event Risk [/B]
Economic activity in the Euro-Zone is expected to expand at a slower pace in the fourth quarter as economists forecast the growth rate to increase 0.3% after rising 0.4% during the three-months through September, and the data could instill a weakened outlook for the region as policy makers expect to see an uneven recovery this year. A report by the European Union’s statistics office showed the jobless rate increased to an 11-year high of 10.0% in December, while retail spending unexpectedly held flat after contracting a revised 0.5% in November, and households may lower their temperament to consume over the coming months as they continue to face a weakening labor market paired with tightening credit conditions. At the same time manufacturing and service-based activity expanded at a slower pace in January as businesses kept a lid on production and employment, while investor confidence weakened for the first time in seven-months, and the European Central Bank may support the real economy throughout the first-half of the year as they expect to see a moderate recovery this year.
The European Central Bank held borrowing costs at the record-low of 1.00% in February, and reiterated that the interest rates remain appropriate as the risks for the economy remain broadly balance. At the same time, President Jean-Claude Trichet continued to expect a “moderate” recovery this year and expects the jobless rate to rise “somewhat” further as business remain reluctant to expand their labor force. Moreover, the central bank head argued that not all of the emergency measures will be needed as economic and financial conditions improve, and noted that the Governing Council will decide on the pace of normalizing policy at its next meeting in March. However, the central bank noted that “high levels of public deficits and debt place an additional burden on monetary policy” in its monthly report, and we may see the central bank maintain a dovish stance next month as Governing Council aim to encourage a sustainable recovery.
Trading the given event risk favors a weakened outlook for the region as economists forecast economic activity to expand at a slower pace in the fourth quarter but nevertheless, price action following an enhanced GDP report could set the stage for a long euro trade. Therefore, if the growth rate expands 0.6% or greater from the previous three-month period, we would need to see a green, five-minute candle following the release to confirm a buy entry on two-lots of EUR/USD. Once these conditions are fulfilled, we will place the initial stop at the nearby swing low or a reasonable distance taking market 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.
On the other hand, the slump in private spending paired with the ongoing deterioration in the labor market is likely to weigh on economic activity going forward, and fears of a protracted recovery could weigh on the exchange rate as policy makers hold a cautious outlook for region. As a result, if the growth rate expands 0.3% or less, we will favor a bearish outlook for the single-currency, and will implement the same setup for a short euro-dollar trade as the long position outlined above, just in reverse.
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[I]To discuss this report contact David Song, Currency Analyst: <[email protected]>[/I]