EUR/USD: Trading the German Unemployment Report

The euro may face increased selling pressures over the next 24 hours of trading as economists forecast German unemployment to rise 43K in July, and fears of a protracted downturn is likely to weigh on the exchange rate as the Bundesbank forecasts growth prospects to remain subdued throughout the first half of 2010.

[B][U]Trading the News: German Unemployment Change

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[B][U]What’s Expected[/U][/B]

Time of release: [B]07/30/2009 07:55 GMT, 03:55 EST[/B]
Primary Pair Impact[B] : EURUSD[/B]

Expected: 43K

Previous: 31K

[B][U]

[/U][/B]

[B][U]Impact the German Unemployment Change 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]

                                                     Jun 2009

                                   06/30/2009  07:55 GMT

                                   45K

                                   [B]31K[/B]

                                   -11

                                   -73

                                                     May 2009

                                   05/28/2009  07:55 GMT

                                   64K

                                   [B]1K[/B]

                                   -23

                                   +64

                         [U]

[/U][U]June 2009 German Unemployment Change[/U][U][/U]

                                     The German labor market weakened further in June, with unemployment rising 31K from the previous month to 3.5M, which is the highest since 2007, and businesses may continue to scale back on production and employment in an effort the weather the downturn in global trade. The data foreshadows a weakening outlook for domestic growth as households face fading demands for employment paired with tightening credit conditions, and the labor market is likely to weaken further throughout the second half of  the year as the  effects of the government stimulus package subside. As a result, the Bundesbank forecasts GDP to contract at an annual pace of 6.2% this year and projects unemployment to peak at 4.4M next year, and fears of a protracted downturn may lead policymakers to take additional steps to soften the landing of Europe’s largest economy as the outlook for growth and inflation remains bleak.

                         [U]

May 2009 German Unemployment Change[/U][U][/U]

                                     Unemployment in Germany rose 1K to 3.46M in May, which crossed the wires much weaker than the 64K rise expected by economists, and the data encourages an improved outlook for Europe’s largest economy as businesses scale back on production and employment at a slower pace. At the same time, the jobless rate unexpectedly slipped to 8.2% from 8.3% in April after the Federal Labor Agency readjusted its methodology to exclude ‘special factors.’ However, as the government forecasts economic activity to contract at an annual rate of 6.2% this year, fears of a protracted downturn is likely to weigh on business sentiment, and firms may continue to take additional steps to lower their cost structure as they face fading demands from home and abroad. As a result, the ECB continued to hold the cash rate at the record-low, and pledged to purchase EUR 60B in covered bonds in an effort to stem the downside risks for growth and inflation.

                         [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 face increased selling pressures over the next 24 hours of trading as economists forecast German unemployment to rise 43K in July, and fears of a protracted downturn is likely to weigh on the exchange rate as the Bundesbank forecasts growth prospects to remain subdued throughout the first half of 2010. At the same time, the bank said economic activity contracted ‘only slightly’ during the second quarter following the expansion in monetary and fiscal policy, and the improved outlook held by policymakers may continue to support the rise in economic confidence as the government takes unprecedented steps to steer Europe’s largest economy out of the recession. A report by the Ifo economic research group showed business sentiment in Germany improved for the fourth consecutive month in July, with the gauge for future expectations rising above 90 for the first time in over a year, and the rebound encourages an improved for future growth as economic activity begins to stabilize. Industrial outputs in May surged 3.7% from the previous month to mark the biggest expansion in nearly 16 years following the jump in factory orders, and the pick-up in economic activity may lead firms to retain their workers as the International Monetary Fund raises its growth forecast for the global economy. However, the German central bank noted credit conditions remained far from normal, with financial institutions continuing to tighten borrowing standards for households and businesses throughout the second quarter, and the government may take further steps to stem the downside risks for growth and inflation in an effort to support a sustainable recovery. Finance Minister Per Steinbrueck continued to see difficulty in the commercial market, stating that “there is a possibility that the Bundesbank could give credit directly into the economy” if conditions continue to worsen however, central bank President Axel Weber countered the arguments by saying that there is ‘no need’ to reach out to individual businesses. Moreover, Mr. Weber went onto say that “only if the banking system were dysfunctional would central banks have to think again about possible action,” and the comments suggests that the central bank will continue to maintain a wait-and-see approach as the stimulus works its way through the real economy. As a result, the lack of support for additional government assistance may lead businesses to lower costs further as demands falter, and speculation for a slower recovery could weigh on the exchange rate going forward.

Trading the given event risk favors a bearish outlook for the euro as labor demands falter but nevertheless, the less-that-expected rise over the last two months has left the door open for an enhanced employment report. Therefore, if unemployment rises 25K or less in June, we will look for a green, five-minute candle following the release to generate a buy entry on two-lots of EUR/USD. Once these conditions are met, we will set our initial stop at the nearby swing low (or reasonable distance), and this risk will determine our first target. Our second objective will be based on discretion, and we will move the stop on the second lot to cost once the first trade reaches its target in order to lock-in our profits.

In contrast, the slump in global trade paired with tightening credit conditions may lead firms to take further steps to lower their cost structure, and price action following the release could set the stage to sell the EUR/USD. As a result, if job losses rise 43K or more from the previous month, 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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