Investor confidence in the Euro-Zone is expected to rise for the second consecutive month in September, with economists forecasting the Sentix index to increase to -13.7 from -17.0 in August, and the rebound in economic sentiment may drive the exchange rate higher as growth prospects improve.
[B][U]Trading the News: Euro-Zone Sentix Investor Confidence Survey[/U][/B]
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[B][U]What’s Expected[/U][/B]
Time of release: [B]09/03/2009 08:30 GMT, 04:30 EST[/B]
Primary Pair Impact[B] : EURUSD[/B]
Expected: -13.7
Previous: -17.0
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[B][U]Impact the Sentix survey had on EURUSD through the last 2 months[/U][/B]
[U]August 2009 Euro-Zone Sentix Investor Confidence[/U]
The Sentix investor confidence survey improved in August, with the index rising to -17 from -31.3 in the previous month, and the unprecedented steps taken on by the government is likely to encourage an improved outlook for future growth as the central bank holds borrowing costs at the record-low and pledges EUR 60B in bond purchases to stimulate the ailing economy. The breakdown of the report showed the gauge for future expectations jumped to 8.0 from -5.5 in July, while the index of current conditions surged to -39.00 from -53.75. The positive reading paired with the rise in the outlook suggests investors are turning less pessimistic towards the economy as the government takes unprecedented steps to steer the region out of recession, and growth prospects are likely to improve throughout the second half of the year as policy makers begin to see signs of stabilization.
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July 2009 Euro-Zone Sentix Investor Confidence[/U]
Investor confidence in the Euro-Zone tipped lower in July for the first time in four months, with the Sentix index falling to -31.3 from -27.0 in the previous month. A deeper look at the report showed the measure for future expectations slumped to -5.5 from 1.25, while the gauge for current conditions slipping to -53.75 from -51.25 in June, and fears of a slower recovery may continue to weigh on the economic outlook as policy makers anticipate growth prospects to remain subdued going into 2010. Nevertheless, as the European Central Bank holds the benchmark interest rate at the record-low and commits EUR 60B in covered bond purchases in an effort to shore up the global financial system, the extraordinary efforts taken on by the Governing Council should help to foster an improved outlook for future growth.
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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]
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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.
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How To Trade This Event Risk[/B]
Investor confidence in the Euro-Zone is expected to rise for the second consecutive month in September, with economists forecasting the Sentix index to increase to -13.7 from -17.0 in August, and the rebound in economic sentiment may drive the exchange rate higher as growth prospects improve. The preliminary 2Q GDP reading showed economic activity contracted 0.1% from the first three months of the year, with household consumption increasing 0.2% amid expectations for a flat reading, while business investments fell less than expected during the three-months through June and conditions are likely to improve throughout the second half of the year as the government takes unprecedented steps to steer the region out of recession. However, a report by the European Union statistics office showed the jobless rate jumped to 10-year high of 9.5% in July, while retail spending unexpectedly weakened during the same period, and investors may turn increasingly pessimistic towards the economy as ECB President Trichet sees a risk of a slower recovery following the slump in employment. Nevertheless, economic sentiment in the Euro-Zone improved for the fifth consecutive month in August, with the ZEW confidence survey jumping to 54.9 from 39.5 in July, which is the highest since April 2006, and the data encourages an improved outlook for the region as the central bank raises its forecasts for growth and inflation. The European Central Bank held the benchmark interest rate at the record-low for the fourth consecutive month and reiterated monetary policy remains “appropriate” as policy makers project economic activity to fall at a slower pace than previously expected. The central bank anticipates the annual rate of growth to fall 4.1% this year amid an initial forecast for a 4.6% drop in GDP, while they see the growth rate now expanding 0.2% in 2010 versus expectations for 0.3% contraction . Moreover, the Governing Council estimates price growth to average 0.4% this year and 1.2% in 2010 , which are up from the forecasts in June, and the improved outlook for growth and inflation may continue to drive the single-currency higher throughout the remainder of the year as investors anticipate the ECB to tighten policy over the next 12-months. Nevertheless, the central bank head curbed expectations for higher borrowing costs, stating that “the term ‘exit strategy’ should be understood as the framework and set of principles guiding our approach to unwinding the various non-standard measures,” and went onto say that “any non-standard measures whose continuation would pose a threat to the achievement of price stability must be undone promptly.” The comments suggests that the central bank will continue to hold borrowing costs at the record-low going into the following year as the ECB sets apart the ‘exit strategy’ from the interest rate policy, and uncertainties surrounding the outlook for future policy may weigh on the exchange rate as policy makers anticipate price pressures to hold below the 2% target in 2010.
Trading the given event risk favors a bullish outlook for the single-currency, and price action following a rise in investor sentiment could set the stage for a long euro-dollar trade. Therefore, if the index rises to -13.7 or higher in September, we will look for a green, five-minute candle subsequent to 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 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.
In contrast, fears of a slower recovery paired with the ongoing slump in lending activity could instill a weakening outlook for future growth, and dismal Sentix survey is likely to weigh on the exchange rate as policy makers anticipate growth prospects to remain subdued throughout the second half of the year. As a result, if the index falls back to -30 or lower, we will favor a bearish forecast 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.</p>
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