The German IFO business confidence survey is expected to improve for the third consecutive month in June, with economists forecasting the gauge for future expectations to increase to 87.3 from 85.9 in May, and speculation for an economic recovery may continue to lead the euro higher as investors weigh the outlook for future policy.
[U][B]Trading the News: German IFO Expectation
Time of release: [B]06/22/2009 08:00 GMT, 04:00 EST[/B]
Primary Pair Impact : [B]EURUSD[/B]
[U][B]Impact the German IFO Expectation report had over EURUSD for the past 2 months[/B][/U]
[B](1 Hour post event )[/B]
[B](End of Day post event)[/B]
05/25/2009 9:00 GMT
04/24/2009 9:00 GMT
[U]May 2009 German IFO Expectation
Business sentiment in Germany improved for the second month in May, with the index rising to 84.2 from 83.7, the IFO’s gauge for future expectations jumped to 85.9 from 83.9 in April. The data suggests firms are turning less pessimistic towards the economy, and are increasing their outlook for future growth as policymakers take unprecedented steps to steer Europe’s largest economy out of its worst recession in over half a century. The European Central Bank lowered the benchmark interest rate by 25bp to a record-low of 1.00% earlier this month, and left the door open for further easing, stating that the Governing Council ‘did not decide that the new level of our policy rates was the lowest level.’ Meanwhile, Bundesbank President Axel Weber warned of being ‘overly optimistic’ as growth prospects remain subdued, and the comments reinforces a weakening outlook for future policy as the ECB maintains a dovish outlook for inflation.
[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.
[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:
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]
The German IFO business confidence survey is expected to improve for the third consecutive month in June, with economists forecasting the gauge for future expectations to increase to 87.3 from 85.9 in May, and speculation for an economic recovery may continue to lead the euro higher as investors weigh the outlook for future policy. However, the record drop in the first quarter GDP paired with the downturn in global trade could weigh on the outlook for future growth, and fears of a protracted recession could drag on the exchange rate as policymakers anticipate growth prospects to remain subdued throughout the year. In its monthly report, the German Economy Ministry said the downside risks for growth and inflation remains ‘unusually high’ and expects a temporary deflation in consumer prices as economic activity falters, and the comments reinforces a weakening outlook for Europe’s largest economy as the German central bank forecasts the growth rate to contract at an annual pace of 6.2% this year. Bundesbank President Axel Weber said that ‘the crisis is likely to put a strain on global financial markets and the real sector for some time to come,’ and expects the annual rate of unemployment to peak towards the end of 2010 into 2011. At the same time, a government report showed factory orders fell at an annualized rate of 37.1% in April, which is the second-largest decline on record, with export sales falling 0.5% from the previous month. Moreover, industrial outputs unexpectedly declined 1.9% from March, while exports slumped 4.8% during the same period, and the data suggests businesses may continue to scale back on production and employment as they face fading demands from home and abroad paired with higher energy. With crude oil prices on the rise, firms may turn increasingly pessimistic towards the future as costs increase, and heightening risks for the region could lead the European Central Bank to take additional steps to jump-start the economy. Nevertheless, as the Governing Board maintains a floor on the benchmark interest rate and commits EUR 60B in covered-bond purchases in an effort to steer the euro-region out of the economic slump, long-term expectations for higher interest rate could the single-currency higher over the near-term.
Expectations for a rise in business confidence favors a bullish outlook for the single-currency, and price action following the release could pave the way for a long euro trade. Therefore, an in-line print or a rise above 87.3 should lead the exchange rate higher, and 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 the 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 lock-in our profits.
In contrast, uncertainties surrounding the outlook for future growth paired with the downturn in global trade may weigh on business sentiment, and an unexpected drop in the IFO index could drag on the euro as economic confidence falters. As a result, an unexpected drop to 83.5 or lower would favor a bearish outlook for the single-currency, and we will follow the same strategy for a short euro-dollar trade as the long position mentioned above, just in reverse.