Business confidence in Germany is widely expected to improve for the sixth consecutive month in September, with economists forecasting the IFO’s gauge for future expectations to increase to 96.6 from 95.0 in the previous month, which would be the highest reading since May 2008, and the data is likely to instill an improved outlook for the region as the economy emerges from the worst recession since the post-war period.
[U][B]Trading the News: German IFO Expectation[/B][/U]
[U][B]What’s Expected[/B][/U]
Time of release: [B]09/24/2009 08:00 GMT, 04:00 EST[/B]
Primary Pair Impact : [B]EURUSD[/B]
Expected: 96.6
Previous: 95.0
[U][B]Impact the German IFO Expectation report has had over EURUSD for the past 2 months[/B][/U]
[U]August 2009 German IFO Expectation[/U]
The German IFO business confidence index increased for the fifth month in August, with the measure for future expectations advancing to 95.0 amid forecasts for a rise to 92.0. At the same time, the headline reading increased to 90.5 from 87.4 in July, and businesses may continue to hold an improved outlook for the region as the economy emerges from the worst recession since the post-war period. At the same time, Bundesbank President Axel Weber held a caution tone and stated that he is “not yet convinced” that the recovery will be sustainable as he expects unemployment to exceed 10% in 2010. However, the central bank head went to say that economic activity in the third-quarter could be “better than thought,” and the enhanced outlook held by Mr. Weber is likely to support the rising trend in business sentiment as growth prospects improve.
[U]July 2009 German IFO Expectation[/U]
Business confidence in Germany improved for the fourth consecutive month in July, with the IFO’s gauge for future expectations increasing to 90.4 amid forecasts for a rise to 90.1, and the data reinforces an enhanced outlook for Europe’s largest economy as the government takes unprecedented steps to steer the nation out of recession. The headline reading for business sentiment advanced to 87.3 from 85.9 in June, which topped expectations for a rise to 86.5, and businesses may continue to turn increasingly optimistic towards the economy as policy makers anticipate growth prospects to improve throughout the second-half of the year. At the same time, the Bundesbank said economic activity contracted “only slightly” in the second-quarter following the record drop during the first three-months of the year, and business sentiment should continue to pick up over the coming months as the outlook for future growth improves.
[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]How To Trade This Event Risk [/B]
Business confidence in Germany is widely expected to improve for the sixth consecutive month in September, with economists forecasting the IFO’s gauge for future expectations to increase to 96.6 from 95.0 in the previous month, which would be the highest reading since May 2008, and the data is likely to instill an improved outlook for the region as the economy emerges from the worst recession since the post-war period. The final GDP reading showed economic activity expanded 0.3% in the second quarter following an 0.8% rise in capital investments, while construction spending increased 1.4% after rising 0.2% in the first three-months of the year. Moreover, the trade surplusexpanded to EUR 13.9B from EUR 12.1B in June, led by a 2.3% rise in exports, while factory orders jumped for the third consecutive month in July as demands for capital and intermediate goods improved. As global trade recovers, businesses are likely to raise their outlook for future growth as Bundesbank President Axel Weber forecasts economic activity to contract at a slower pace than initial expected, and the extraordinary efforts taken on by the government should help to foster a sustainable recovery as the European Central Bank looks beyond the interest rate to manage monetary policy. However, Mr. Weber held a caution tone and said that the nation is “far away from a sustainable upswing” as he projects economic activity to return ‘only slowly’ in the following year, while ECB council member Ewald Nowotny anticipates an L-shaped recovery in the euro-region as he expects the worst financial crisis since the Great Depression to have long-lasting effects on the overall economy. As a result, firms may turn increasingly pessimistic over the coming months as policy makers anticipate to see low levels of growth going into the following, and fears of a protracted recovery is likely to weigh on business sentiment as they continue to face tightening credit conditions paired with the slump in global trade. Nevertheless, as the European Central Bankexpects to see an “uneven” recovery paired with “subdued” price pressures, the Governing Council is likely to hold the benchmark interest rate at the record-low going into the following year, and may hold a neutral policy stance going forward as policy makers project Europe’s largest economy to remain weaken throughout the first half of 2010.
Trading the given event risk favors a bullish outlook for the single-currency as economists forecast business sentiment to improve for the sixth month, and price action following the release could set the stage for a long euro-dollar trade. Therefore, if the gauge for future expectations increases to 96.6 or higher in September, 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 a reasonable distance, and this risk will establish our first target. Our second objective will be based on discretion, and we will move the stop on the second lot to breakeven once the first trade reaches its target.
On the other hand, fears of a protracted recovery paired with the ongoing slump in global trade may weigh on businesses as policy makers anticipate economic activity to remain at low levels going into the following year, and an unexpected drop in the IFO’s gauge for future expectations is likely to weigh on the exchange rate as the outlook for growth and inflation remains weak. As a result, if the index falls back to 90.0 or lower, we will favor a bearish outlook for the single-currency, and will follow the same strategy for a short euro-dollar trade as the long position mentioned above, just in reverse.
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[I]
To discuss this report contact David Song, Currency Analyst: <[email protected]>[/I]