Retail sales in the Euro-Zone is widely expected to remain subdued throughout the year, with economists forecasting consumer spending to fall 0.1% in May, and the data is likely to drag on the exchange rate as investors weigh the outlook for future growth.
[U][B]Trading the News: Euro-Zone Retail Sales[/B][/U]
[B]What’s Expected[/B]
Time of release: [B]07/03/2009 09:00 GMT, 05:00 EST[/B]
Primary Pair Impact : [B]EURUSD[/B]
Expected: -0.1%
Previous: 0.2%
[B][U]Impact the European Central Bank Rate Decision has had on EURUSD over the last 2 months[/U][/B]
[B]Period[/B]
[B]Data Released[/B]
[B]Estimate[/B]
[B]Actual[/B]
[B]Pips Change[/B]
[B](1 Hour post event )[/B]
[B]Pips Change[/B]
[B](End of Day post event)[/B]
Apr 2009
06/04/2009 09:00 GMT
0.2%
[B]0.2%[/B]
-22
-28
Mar 2009
05/06/2009 09:00 GMT
0.1%
[B]-0.6%[/B]
-4
+172
[U]
April 2009 European Central Bank Rate Decision[/U]
The U.S. economy shed another 345K job May amid expectations for a 520K drop in non-farm payrolls, while the annual rate of unemployment surged to a 25-year high of 9.4% as discouraged workers returned to the labor force. The data encouraged an improved outlook for the world’s largest economy, with market participants raising bets for an economic recovery later this year, and long-term expectations for higher interest rates could lead the dollar higher over the near-term. At the same time, Fed Chairman Bernanke held a dour outlook for the economy as he expects unemployment to rise well ‘into the next year,’ and sees a risk for a ‘sizeable’ increase in job losses as businesses continue to scale back on production and employment in an effort to reduce costs. As a result, the outlook for private spending remains bleak, and households may turn increasingly pessimistic towards the economy as the labor market deteriorates.
[U]March 2009 European Central Bank Rate Decision[/U]
U.S. Non-Farm Payrolls fell 539K in April amid expectations for a 600K drop in employment, while the jobless rate surged to 8.9% from 8.5% in March, which is the highest level since 1983. The data breakdown of the report showed public-sector jobs increased 72K during the month, with the participation rate rising to 65.8% from 65.5%, while private payrolls slumped 611K from the previous month. The data suggests economic conditions are beginning to stabilize as the government takes unprecedented steps to stimulate the ailing economy however, growth prospects are likely to remain subdued throughout the first half of the year as households face a weakening labor market paired with fears of a protracted downturn. At the same time, the collapse of the auto industry is likely to weigh on the economy going forward, and the jobless rate is likely to push higher as GM and Chrysler head into bankruptcy.
[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.
[B]
How To Trade This Event Risk [/B]
Retail sales in the Euro-Zone is widely expected to remain subdued throughout the year, with economists forecasting consumer spending to fall 0.1% in May, and the data is likely to drag on the exchange rate as investors weigh the outlook for future growth. The preliminary GDP reading showed economic activity 2.5% during the first quarter to mark the biggest decline since recordkeeping began in 1995, led by a 0.5% drop in private consumption, while the employment component plunged 0.8% during the same period, which was the largest drop on record. In addition, a report by the Eurostat said the annual rate of unemployment rose to a 10-year high of 9.5% in May as businesses continued to scale back on production and employment, and the outlook for consumer spending remains bleak as households face a weakening labor market paired with fears of protracted recession. At the same time, the Organization for Economic Cooperation and Development forecasts the jobless rate to average 10.0% this year and 12.0% in 2010, while the growth rate is expected to fall at an annualized rate of 4.8% this year, and the dour outlook held by the group reinforces fears of a deepening downturn as growth and inflation falter. Moreover, the Shadow European Central Bank said that the central bank should lower the benchmark interest by another 50bp in an effort to jump-start the economy as policymakers anticipate economic activity to contract 4.6% this year however, as the Governing Council adopts a wait-and-see approach and attempts to put a floor on the interest rate, the lack of decisive action could weigh on households as the region faces its worst recession in over half a century. Nevertheless, as President Trichetsees inflation expectations well anchored and anticipates economic activity to expand next year, the ECB is likely to hold the benchmark interest rate steady throughout the rest of the year, and long-term expectations for higher borrowing costs could lead the single-currency higher over the near-term.
Trading the given event risk favors a bearish outlook for the euro as market participants anticipate consumer consumption to fall 0.1% however, the unexpected rise in German retail sales has left the door open for an upward surprise. Therefore, if household spending increases 0.2% or more in May, we will look for a green, five-minute candle subsequent to the release to confirm a buy-entry on two lots of EUR/USD. Once these conditions are met, we will place our initial stop at the nearby swing low (or reasonable distance), and this risk will establish out first target. Our second target will be based on discretion, and in order to preserve our profits, we will move the stop on the second lot to breakeven once the first trade reaches its target.
On the other hand, forecasts for a 0.1% drop in retail spending is likely to weigh as economists anticipate the unemployment rate to push higher throughout the year, and fears of a protracted economic downturn could drag on the outlook for future policy as growth and inflation falter. As a result, bearish price action following an in-line print or a drop of more than 0.1% could lead the exchange rate to fall lower, and we will follow the same strategy for a short euro-dollar trade as the long position mentioned above, just in reverse.
