Will the European Central Bank finally join the rank and file of the Fed, BoC and BoE and lower its benchmark lending rate; or will President Jean Claude Trichet and his fellow policy makers make their stand with inflation and continue to entertain their hawkish outlook? The answer to this question will not be answered until next week when the ECB announced its rate decision on March 6th; but a volatile mix of growth and inflation data scheduled for release this Friday can certainly guide speculation. Due for simultaneous release tomorrow at 04:00 GMT are the January German retail sales and consumer price index numbers. Together, these two indicators will act as a barometer of the central bank’s two most closely watched economic trends for determining monetary policy: price pressures and growth.
Trading the News: German Retail Sales / Consumer Price Index
What’s Expected
Time of release: 02/29/2008 07:00 GMT, 02:00 EST
Primary Pair Impact : EURUSD
Expected: 1.0%
Previous: -1.0%
How To Trade This Event Risk
Will the European Central Bank finally join the rank and file of the Fed, BoC and BoE and lower its benchmark lending rate; or will President Jean Claude Trichet and his fellow policy makers make their stand with inflation and continue to entertain their hawkish outlook? The answer to this question will not be answered until next week when the ECB announced its rate decision on March 6th; but a volatile mix of growth and inflation data scheduled for release this Friday can certainly guide speculation. Due for simultaneous release tomorrow at 04:00 GMT are the January German retail sales and consumer price index numbers. Together, these two indicators will act as a barometer of the central bank’s two most closely watched economic trends for determining monetary policy: price pressures and growth. The inflation reading will be the less likely market mover as it is a final reading. However, printing in line with its initial release will remind analysts and traders that inflation has cooled for two consecutive months from the November reading, which was reported the fastest pace of price growth since records began back in 1996. Alternatively, the consumer spending data is still an unknown for the market. Up until last year, the economy was coasting along with its strongest growth since the beginning of the millennium. However, the market has taken note of a few critical changes. Fourth quarter GDP cooled to its slowest annual pace since the second quarter of 2006, with personal consumption falling 0.8 percent. Consumer sentiment has held near a two year low and necessary living costs have surged. Perhaps most ominous is the results of the January Bloomberg Retail PMI report which reported slowing sales growth for a fourth consecutive month.
When considering the German fundamentals scheduled for release on Friday, it will be important to take into account the recent strength of the euro (especially against the battered US dollar). For a long EURUSD trade, we will look for a jump in retail sales that at least doubles the market’s forecast (2.0 percent or more). An unexpected uptick in the annual CPI numbers would be certainly boost our confidence in holding a long position as it would further secure the probability that the ECB will hold lending rates untouched; however an unchanged inflation figure work fine. This data could easily fuel EURUSD’s already impressive rally; but it will be imperative to keep our profit targets within reason as sentiment can grow fragile after such a momentous move and position can quickly turn against us with for no fundamental reason. With the right data mix, we will look for a green, five minute bar to confirm entry on two lots of ERUSD with a stop below the nearby swing low (or reasonable distance). First target will equal the risk taken on each lot and the second will be based on discretion (with a mind to volatility). To preserve profit, we will move the stop on the second lot to breakeven when the first hits its target.
Alternatively, a short position would take a fundamental wave that could change the outlook for the ECB’s coming rate decision. We will look both a dip in CPI and a greater than 2.0 percent drop in sales for a short; and we will follow the same setup as above, just reversed.
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Written by John Kicklighter[/B], Currency Analyst for DailyFX.com[/I]
Have comments or questions on this or other articles authored by John? E-mail him at <[email protected]>.