Faltering Consumer Sentiment Could Lead The US Into A Recession

The fundamental coffers are virtually empty heading into the end of the second full week of February. In fact, the only indicator with market moving potential is the University of Michigan’s monthly consumer sentiment report. The preliminary reading for this month is expected to erase the unexpected rebound in optimism reported through January as the cost of living continues to rise and lending restrictions continue to tighten. However, the true weight on consumer sentiment now seems to be economic data itself.

Trading the News: US University of Michigan Consumer Confidence Survey
What’s Expected
Time of release: 02/15/2008 15:00 GMT, 10:00 EST
Primary Pair Impact : EURUSD
Expected: 77.0
Previous: 78.4


How To Trade This Event Risk
The fundamental coffers are virtually empty heading into the end of the second full week of February. In fact, the only indicator with market moving potential is the University of Michigan’s monthly consumer sentiment report. The preliminary reading for this month is expected to erase the unexpected rebound in optimism reported through January as the cost of living continues to rise and lending restrictions continue to tighten. However, the true weight on consumer sentiment now seems to be economic data itself. Signs that unemployment is rising, the service sector contracted for the first time in nearly four years and general growth cooled sharply through the end of 2007 have all weighed on American’s outlook for the economy’s health and their own financial condition. While this indicator has not had much impact on the dollar in the past month, conditions have changed in favor of a more serious reaction from event risk traders with the right surprise. Key to a potential trade is the fact that there are no other major economic indicators scheduled for release in the US session to interfere with potential follow through after the sentiment gauge is released. What’s more, market participants and economists will be more interested in consumer confidence everyone looks for signs that the world’s largest economy is heading for a recession. Though Treasury secretary Paulson and Fed Chairman Bernanke recently predicted the US would avoid a recession in 2008, the market has not been struck with the same confidence. And, since the consumer is the last leg of positive growth, the stakes are that much higher.
There is little speculation behind an improvement in consumer confidence through the most recent month; therefore, a strong improvement may catch the market off guard and lead to a rally from the greenback. The consensus among economists is already looking for a moderate drop in the sentiment gauge to a 76.0 reading. What’s more, ancillary sentiment reports support such an outcome. The ABC/Washington Post’s Consumer Comfort Index for the week ending February 10th fell to its lowest level in 14 years. What’s more, more than 50 percent of respondents to the survey had a pessimistic outlook for their personal finances for the first time since 1993. Despite the surprise factor in a stronger-than-expected report, we will still look for a significant increase from the indicator (5 points or more) before considering a long dollar (short EURUSD) position. With the right fundamentals and a red five minute candle, we will go short two lots with a stop above the nearby swing high (or reasonable distance). Our first target will equal the risk and the second will be set by discretion. To conserve profit on a winning trade, we will move the stop on the second lot to break even when the first takes profit.
On the other hand, with the dollar thoroughly battered and officials still forecasting a rebound in growth; a drop in confidence could accelerate a dollar drop. We will look for an equivalent disappointment for a short and follow the same strategy as above, just reversed.

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[I]Written By: John Kicklighter, Currency Analyst for DailyFX.com

To contact John about this or other articles he has authored, email him at <[email protected]>. [/I]