The GfK consumer confidence survey is expected to reinforce a weakening outlook for private consumption as economists forecast the index to fall to 2.3 from 2.4 in April however, households may hold an improved economic outlook for the region as policymakers continue to take unprecedented step to steer the economy out of a recession.
[B][U]Trading the News: German GfK Consumer Confidence Survey[/U][/B][B][/B]
[B][U]
What’s Expected[/U][/B]
Time of release: [B]04/27/2009 06:10 GMT, 02:10 EST[/B]
Primary Pair Impact[B] : EURUSD[/B]
Expected: 2.3
Previous: 2.4[B][/B]
[U][B]Impact the German GfK Consumer Confidence Survey had over EURUSD for the past 2 [/B][/U][U][B]mont[/B][/U][U][B]hs[/B][/U]
[U]April 2009 German GfK Consumer Confidence Survey[/U]
The GfK consumer confidence survey failed to meet expectations in April as the index slipped lower for the first time in seven months, and households may turn increasingly pessimistic towards the economy as they face a weakening labor market paired with tightening credit conditions. The confidence index slipped to 2.4 from a revised reading of 2.5 in March, while the gauge for economic expectations fell to -32.8 from -27.9 in the previous month, and the data foreshadows a weakening outlook for private-consumption as the region faces a deepening recession. Meanwhile, after lowering the benchmark interest rate by 25bp to 1.25% in March, ECB President Trichet signaled that borrowing costs could fall lower as growth and inflation falter however, as the central bank head remains reluctant to overshoot the interest rate, policymakers may place a floor on rates and adopt unconventional measures to manage policy going forward.
[U]March 2009 German GfK Consumer Confidence Survey[/U]
Consumer sentiment in Germany unexpectedly improved for the sixth consecutive month in March as the GfK survey increased to 2.6 from a revised reading of 2.3 in the previous month however, households may turn increasingly pessimistic towards the economy as the region faces its worst economic downturn in over half a century. Deteriorating fundamentals paired with tightening credit conditions continues to foreshadow a weakening outlook for Europe’s largest economy but nevertheless, as policymakers continue to take unprecedented steps to steer the nation out of a recession, the extraordinary efforts has helped to spark hopes for a recovery later this year. Meanwhile, as the IMF expects economic activity in Germany to contract 2.5% in 2009, the outlook for growth and inflation remains bleak, and the European Central Bank is widely expected to ease policy further next month in an effort to jump-start the economy.
[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:
[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 GfK consumer confidence survey is expected to reinforce a weakening outlook for private consumption as economists forecast the index to fall to 2.3 from 2.4 in April however, households may hold an improved economic outlook for the region as policymakers continue to take unprecedented step to steer the economy out of a recession. The jump in the March ZEW investor confidence survey paired with the uptick in business sentiment could reinforce expectations for a recovery later this year however, as the International Monetary Fund forecasts Europe’s largest economy to contract 5.6% this year and expects trade conditions to deteriorate further, the economic outlook remains bleak. German exports fell for the fifth consecutive month in February, while factory orders fell at an annualized pace of -38.2% during the same period to mark the worst slump since records began in 1991, and retail sales unexpectedly slipped lower from January as households face fading demands for employment. Labor conditions continued to deteriorate throughout the first quarter as unemployment jumped 69K to 3.4M in March, which raised the jobless rate for the fourth consecutive month to an annual rate of 8.1% from a revised reading of 8.0% in February, and the labor market is likely to weaken further as firms continue to cut back on production and employment in an effort to reduce costs. A report by the Economy Ministry showed that industrial outputs fell for the six consecutive month in February, which pushed the annualized rate of production to -20.6% from a revised reading of -17.9% in January, while producer prices marked its first annual decline in five-years as price pressures dropped at its fastest pace since 2002, and the data reinforces a weakening outlook for growth and inflation as economic activity deteriorates at a record pace. As a result, the European Central Bank said that there was scope for borrowing costs to fall lower in May after cutting the overnight rate by 25bp to a record-low of 1.25% earlier this month however, as President Trichet remains reluctant to overshoot the interest rate while the Governing Council fails to meet on common ground, the division amongst policymakers could prolong the downturn in the economy as the central bank adopts a wait-and-see approach, and expects a recovery in 2010. Nevertheless, expectations for a drop in household sentiment could weigh on the exchange rate as the outlook for private consumption deteriorates, but at the same time, as risk trends continue to dictate price action in the foreign exchange market, a rise in market sentiment following the G20 meeting over the weekend could drive demands for the euro as investor confidence improves.
Trading the given event risk favors a bearish outlook for the single-currency as household sentiment is expected to fall in May but nevertheless, an enhanced confidence report could set the stage for a long euro trade as policymakers pledge to stem the downside risks for growth and inflation. Therefore, if the GfK index unexpectedly increased to 2.6 or higher, we will look for a green, five- minute candle following 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 our first target. Our second target 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.
Conversely, as firms continue to cut back on production and employment while credit conditions remain far from normal, deteriorating growth prospects are likely to drag on households, and a drop in consumer sentiment is likely to weigh on the single-currency as the outlook for growth and inflation remains bleak. As a result, an in-line print or a drop below 2.3 should lead the exchange rate lower, and we will follow the same strategy for a short euro-dollar trade as the long position mentioned above, just in reverse.
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