Consumer sentiment in the U.S. is expected to improve in September as economists forecast the University of Michigan survey to rise to 67.5 from a revised reading of 65.7 in August, and the release may lead the greenback to retrace the decline from earlier this week as the outlook for future growth improves.
[B][U]Trading the News: U. of Michigan Confidence Survey[/U][/B]
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[B][U]What’s Expected[/U][/B]
Time of release: [B]09/11/2009 13:55 GMT, 09:55 EST[/B]
Primary Pair Impact[B] : EURUSD[/B]
Expected: 67.5
Previous: 65.7
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[B][U]Impact the U. of Michigan survey has had on EURUSD through the last 2 months[/U][/B]
[U]August 2009 U. of Michigan Confidence Survey[/U]
Consumer confidence in the U.S. unexpectedly tipped lower for the second month in August, with the U. of Michigan index falling to 63.2 from a revised reading of 66.0 in July, and the data foreshadows a weakening outlook for private spending as households face fading demands for employment paired with the slump in bank lending. The breakdown of the report showed the measure of economic sentiment slipped to 64.9 from 70.5 in July, while the outlook tipped lower to 62.1 from 63.2 in the previous month, and fears of a slower recovery may continue to weigh on household sentiment as policy makers anticipate the annual rate of unemployment to reach 10% by the end of the year. Nevertheless, as the Fed forecast economic activity to improve throughout the second-half of the year, consumers may hold an enhanced for the economy as the government takes unprecedented steps to stem the downside risks for growth and inflation.
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July 2009 U. of Michigan Confidence Survey[/U]
The U. of Michigan confidence survey weakened more than expected in July, with the index falling back to 64.6 from 70.8 in the previous month amid expectations for a drop to 70.0, and households may turn increasingly pessimistic towards the economy as they continue to face a weakening labor market paired with tightening credit conditions. A deeper look at the report showed the economic outlook slipped to 60.9 from 69.2 in June, while a gauge of economic sentiment pulled back to 70.4 from 73.2, and the data foreshadows a dour outlook for private-sector spending as households continue to ramp up their rate of savings. At the same time, consumer anticipate price growth to hold at an annual rate of 3.0% over the next 12 months versus expectations for 3.1% in the previous month, and the weakening outlook for growth and inflation may lead the government to expand policy further in order to steer the economy out of recession.
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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]
Consumer sentiment in the U.S. is expected to improve in September as economists forecast the University of Michigan survey to rise to 67.5 from a revised reading of 65.7 in August, and the release may lead the greenback to retrace the decline from earlier this week as the outlook for future growth improves. The final GDP reading showed economic activity slipped at an annual rate of 1.0% in the second quarter amid expectations for a 1.5% contraction, with personal consumption falling less than expected, and the extraordinary efforts taken on by the government should continue to support the ailing economy as the Federal Reserve holds the benchmark interest rate at the record-low and commits $1.75T in asset purchases to stem the downside risks for growth and inflation. However, a report by the Commerce Department showed retail spending unexpectedly tipped lower in July, with chain-store sales falling for the twelfth month in August, while personal incomes held flat in July after falling 1.1% in the previous month. In addition, a report by the central bank showed consumer credit plunged at an annual rate of $21.6B in July to mark the biggest drop on record, while the annual rate of unemployment surged to a 26-year high of 9.7% in August, and households may turn increasingly pessimistic towards the economy as the Fed forecasts the jobless rate to reach 10% by the end of the year. At the same time, Treasury Secretary Timothy Geithner reinforces a weakened outlook for the economy and anticipates job losses to peak in the second-half of 2010 as businesses continue to scale back on production and employment, and the slump in the labor market may hamper the prospects for a sustainable recovery as private-sector spending falters. Meanwhile, the Fed’ Beige Book noted that there have been “signs of improvement” in 5 of the 12 districts, with economic activity in most areas stabilizing however, the central bank stated that demands for employment remained weak across the nation while household spending remains relatively “flat” during July and August. Moreover, the statement said “credit standards remained tight,” while the construction spending “kept declining in all districts,” and a downturn in consumer confidence may weigh on the greenback as investors weigh the outlook for future policy. Nevertheless, as risk trends continue to dictate price action in the foreign exchange market, the rise in market sentiment may weigh on the reserve currency as investors increase their appetite for higher yielding assets.
Trading the given event risk favors a bullish outlook for the greenback as economists anticipate consumer sentiment to rebound in September, and price action following the release could set the stage for a long euro-dollar trade as growth prospects improve. Therefore, if the U. of Michigan confidence survey advances to 67.5 or higher from the previous month, we will look for a red, five-minute candle following the release to confirm a sell entry on two-lots of EUR/USD. Once these conditions are met, we will set our initial stop at the nearby swing high (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 in an effort to lock-in our profits.
On the other hand, tightening credit conditions paired with the slump in the labor market may lead households to turn increasingly pessimistic towards the economy, and an unexpected drop in consumer confidence is likely to weigh on the exchange rate as policy makers see a risk for a slower recovery. As a result, if the index falls back to 61.0 or lower, we will favor a bearish forecast for the reserve currency, and will follow the same strategy for a long euro-dollar trade as the short position mentioned above, just in reverse.
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