EUR/USD: Trading the Euro-Zone Gross Domestic Product Report

The 1Q GDP reading for the Euro-Zone is likely to reinforce a weakening outlook for the nation as economists forecast the growth rate to contract 2.0% from the fourth quarter, and fundamental headwinds are likely to weigh on the exchange rate as the region faces its worst economic downturn in over half a century. The jobless rate surged to 8.9% from a revised reading of 8.7% in February, which is the highest since November 2005.

[B][U]Trading the News: Euro-Zone Gross Domestic Product[/U][/B][B][/B]

[B][U]What’s Expected[/U][/B]

Time of release: [B]05/15/2009 10:00 GMT, 05:00 EST[/B]

Primary Pair Impact[B] : EURUSD[/B]

Expected: -2.0%

Previous: -1.6%[B][/B]

Effect the Euro-Zone Gross Domestic Product report had over EURUSD for the past 2 months

       [U]4Q 2008 Euro-Zone Gross Domestic Product[/U]

                                     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.

[U]3Q 2008 Euro-Zone Gross Domestic Product[/U]

                                     The   Euro-Zone slipped into its first recession in 15-years as the advanced GDP   reading for the third quarter showed that economy contracted another 0.2%   from the previous quarter, which lowered the annual rate of growth to 0.7%   from 1.4%. Mounting growth fears paired with the fall in global commodity   prices led the European Central Bank to lower the benchmark interest rate by   100bp over the last two-months to 3.25% after hold rates at a seven-year high   of 4.25% throughout the third quarter, and the central bank is likely to ease   policy further over the coming months as price pressures alleviate.   Nevertheless, as global trade conditions falter, economic activity throughout   the region is likely to weaken further, and may lead policy makers to step up   their efforts in the coming months in order to steer the economy out of a   recession.

[B]What To Look For Before The Release[/B]

                                      [B][U]Bullish Scenario:[/U][/B]

         [B][U][/U][/B]

         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.

                                   [B][U]Bearish   Scenario:[/U][/B]
         
         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.

      [B]How To Trade This Event Risk[/B] 

The 1Q GDP reading for the Euro-Zone is likely to reinforce a weakening outlook for the nation as economists forecast the growth rate to contract 2.0% from the fourth quarter, and fundamental headwinds are likely to weigh on the exchange rate as the region faces its worst economic downturn in over half a century. The jobless rate surged to 8.9% from a revised reading of 8.7% in February, which is the highest since November 2005, while the annual rate of consumption plunged 4.2% from the previous year to mark the biggest drop since recordkeeping began in 1996, and conditions are likely to get worse as firms may continue to scale back on production and employment in an effort to weather the slump in the global economy. A report by the European Union’s statistics office showed industrial outputs fell 20.2% in March from the previous year to mark the biggest downturn since the series began in 1986, while new orders dropped at a record pace as demands slipped 34.5% from last year, and fading demands from home and abroad is likely to weigh on economic activity throughout the year. Meanwhile, a separate report showed exports to the U.S., the Euro-Zone’s second-largest trading partner, slumped at an annual pace of 27% in February, while demands from the U.K. plunged 29% from the previous year, and the data reinforces a dour outlook for future growth as the downturn in the global economy intensifies. As a result, the European Central Bank lowered the benchmark interest rate by 25bp to a record-low of 1.00% earlier this month in an effort to steer the economy out of the worst recession in over half a century, while the Governing Council ‘agreed in principle’ to utilize tools beyond the interest rate to manage monetary policy as the board attempts to put a floor on the interest rate. However, the lack of decisive action by the central bank paired with the dissenting views amongst policymakers have raised speculation that the ECB has done too little too late, and uncertainties surrounding the outlook for future policy could weigh on the exchange rate over the near-term. As a result, expectations for further easing are likely to stoke increased selling pressure for the euro over the remainder of the month as the central bank maintains a dovish stance however, as risk trends continue to drive price action in the foreign exchange market, the rise in market sentiment could drive the single-currency higher as investors increase their appetite for risk.

Trading the given event risk favors a bearish outlook for the single currency as the growth rate is expected to fall further in the first quarter but nevertheless, an enhanced growth reading could set the stage for a long euro trade as market participants move into higher risk/reward investments. Therefore, if economic activity contracts 1.5% or less in the first quarter, we will look for a green, five-minute candle following the release to validate a buy entry on two lots of EUR/USD, and once these conditions are met, we will place our initial stop at the nearby swing low (or reasonable distance taking volatility into account), and this risk will determine our first target. Our second target will be based on discretion, and in an effort to preserve our profits, we will move the stop on the second lot to breakeven once the first trade reaches its target.

In contrast, the downturn in global trade paired with the rise in unemployment is likely to weigh on economic activity, and fears of a deepening recession are likely to weigh on the exchange rate as the economic downturn intensifies. As a result, an in-line print, or a drop of more than 2.0% in the growth rate would lead us to hold a bearish outlook for the single currency, and we will follow the same setup for a short euro-dollar trade as the long position mentioned above, just in reverse.

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