The euro may continue to push higher over the following week as economists forecast the German IFO business confidence survey to reinforce an improved outlook for future growth, and speculation that the worst of the recession has passed may continue to support the rise in market sentiment as investors increase their appetite for risk.
[B][U]Trading the News: German IFO Expectation[/U][/B]
[B][U]
[/U][/B]
[B][U]What’s Expected[/U][/B]
Time of release: [B]05/25/2009 08:00 GMT, 04:00 EST[/B]
Primary Pair Impact[B] : EURUSD[/B]
Expected: 85.4
Previous: 83.9
[B][U]
[/U][/B]
[B][U]Impact the German IFO Expectation report had over EURUSD for the past 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
04/24/2009 9:00 GMT
82.6
[B]83.9[/B]
+20
+19
Mar 2009
03/25/2009 9:00 GMT
81.5
[B]81.6[/B]
+34
+93
[U]
April 2009 German IFO Expectation[/U]
The German IFO business confidence survey bounce back from a 26-year low of 82.1 to 83.7 in April, while firms continued to hold an improved outlook for growth as the gauge for future expectations increased to 83.9 from 81.6. The data suggests businesses are turning less pessimistic towards the economy as policymakers continue to take additional steps to shore up the economy, and the European Central Bank is widely expected to lower the benchmark interest rate to a record low next month in an effort to steer the region out of a recession. At the same time, the figures could imply that the worst of the economic downturn has passed however, as Bundesbank President Axel Weber expects economic activity to contract throughout the year, the outlook for growth and inflation remains bleak, and the ECB could be forced to step up its efforts as the downturn in global trade intensifies.
[U]
March 2009 German IFO Expectation[/U]
Business confidence in Germany slipped to its lowest level since 1982, while firms raised their outlook for future growth as policymakers continued to take unprecedented steps to shore up the economy. The IFO business climate index fell to 82.1 from 82.6 in February, while a measure of expectations increased to 81.6 from 80.9, and the extraordinary efforts taken on by policymakers may continue to reinforce an improved outlook for future growth as the European Central Bank is anticipated to cut borrowing costs further in the month ahead. The ECB continued to hold a dovish tone following the policy meeting in March, stating that the interest rate could fall further from the record low of 1.50% as the downturn in the global economy intensifies, and may adopt tools beyond the interest rate as the outlook for growth and inflation remains bleak.
[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 euro may continue to push higher over the following week as economists forecast the German IFO business confidence survey to reinforce an improved outlook for future growth, and speculation that the worst of the recession has passed may continue to support the rise in market sentiment as investors increase their appetite for risk. At the same time, deteriorating fundamentals paired with the downturn in global trade suggests that the region still has ways to go before economic activity recovers, and the outlook for future growth remains dim as Bundesbank President Axel Weber anticipates to see a turnaround in 2010. The preliminary GDP reading for the first quarter showed economic activity fell at a record pace, led by a drop in exports and business investments, and the data foreshadows a weakening outlook for growth and inflation as firms continue to scale back on production and employment in an effort to weather the first global recession since World War II. Moreover, a report by the Federal Labor Agency show unemployment rose for the sixth consecutive month in April to 3.46M as the economy lost 58K jobs from the previous month, while retail spending unexpectedly dropped 1.0% in March, and economic conditions are likely to deteriorate further as Mr. Weber projects growth prospects to remain subdued throughout year. Nevertheless, industrial outputs held steady in March to end a six-month slump, while factory orders unexpectedly increased in March for the first time in seven months, and the mild improvement in business activity could imply firms are turning less pessimistic towards the economy as policymakers continue to take unprecedented steps to steer the region out of a recession. The European Central Bank lowered the overnight lending rate by 25bp earlier this month to a record-low of 1.00%, and went onto say that the Governing Council has ‘agreed in principle’ to utilize nonstandard tools to manage monetary policy as the board attempts to put a floor on the interest rate. However, council member Ewald Nowotny said that he anticipates the ECB’s growth forecast to fall lower in June, and the comments reinforce a weakening outlook for future policy as President Trichet forecasts price growth to fall into negative territory ‘for some months around mid-year.’ Meanwhile, as the Governing Council fails to meet on common ground, the lack of decisive action paired with expectations for further easing could weigh on the exchange rate over the near-term as investors weigh the outlook for future policy but nevertheless, as risk trends continue to drive price action in the foreign exchange market, the rise in market sentiment could lead the euro higher as traders move into higher risk/reward investments.
Trading the given event risk favors a bullish outlook for the single-currency as economists forecast the gauge for future expectations to increase to 85.4 from 83.9 in April, and the surge in the ZEW investor confidence survey has left the door open for an upward surprise as economic sentiment improves. Therefore, an in-line or a rise above 85.4 would lead us to hold a bullish outlook for the euro, and 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 taking volatility into account), and this risk will establish our first target. The 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.
On the other hand, fading demands from home and abroad paired with expectations for a prolong recession could weigh on the outlook for future growth, and an unexpected downturn in business sentiment could drag on the euro as economic activity falter. As a result, a drop to 81.0 or lower would favor 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.
