The preliminary GDP reading for the U.S. is likely to reinforce a weakening outlook for future growth as market participants forecast economic activity to contract 1.5% in the second-quarter, and the slump in private-sector spending may continue to weigh on the exchange rate as policymakers see a risk for a slower recovery.
Trading the News: U.S. Gross Domestic Product (Annualized)
What’s Expected
Time of release: 08/27/2009 12:30 GMT, 08:30 EST
Primary Pair Impact : EURUSD
Expected: -1.5%
Previous: -1.0%
Impact the U.S. GDP has had on EURUSD over the last 2 quarters
| Period | Data Released | Estimate | Actual | Pips Change (1 Hour post event ) | Pips Change (End of Day post event) |
| 1Q – 2009 | 05/29/2008 12:30 GMT | -5.5% | -5.7% | -14 | +50 |
| 4Q – 2008 | 02/27/2008 13:30 GMT | -5.4% | -6.2% | |
|
| The preliminary 1Q GDP report showed economic activity in the U.S. contracted at an annual pace of 5.7% from the fourth quarter amid expectations for revision to reflect a 5.5% decline in the growth rate, and conditions may continue to get worse as businesses scale back on production and employment in an effort to weather the downturn in global trade. The breakdown of the report showed personal consumption increased 1.5% after contracting 4.3% in the fourth quarter, while companies lowered stockpiles of unsold goods at a record pace during the first three-months of 2009, and the data is likely to reinforce fears of protracted downturn as households and businesses cut back on spending. As a result, the Fed is likely to hold borrowing costs at the record-low and maintain its $175B in asset purchases in order to jump-start the ailing economy. | |
4Q 2008 U.S. Gross Domestic Product
| Economic activity in the U.S. contracted at an annual rate of 6.2.% in the fourth quarter to mark the largest decline since 1982, and policy makers may take additional steps to soften the landing of the world’s largest economy as private sector spending falters. A deeper look at the GDP reported showed business spending slumped at an annual rate of 29%, which is the biggest drop since 1958, while personal spending declined 4.3% from the third quarter, and the downturn in domestic consumption is likely to drag on economic activity going forward as private sector spending accounts for more than two-thirds of GDP. As a result, the Fed is widely expected to hold the benchmark interest rate at the record low of 0.25% throughout the second-half of the year, and may continue to ease policy further as the outlook for growth and inflation remains weak. | |
What To Look For Before The Release
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:
| Bullish Scenario: 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. | Bearish Scenario: |
| | |
How to Trade This Event Risk
The preliminary GDP reading for the U.S. is likely to reinforce a weakening outlook for future growth as market participants forecast economic activity to contract 1.5% in the second-quarter, and the slump in private-sector spending may continue to weigh on the exchange rate as policymakers see a risk for a slower recovery. A report by the Commerce Department showed retail spending unexpectedly fell 0.1% in July, while consumer credit weakened for the fifth month in June to mark the longest slump since recordkeeping began in 1991, and the data suggests households are turning increasingly pessimistic towards the economy as the Fed forecasts unemployment to peak at a high of 10% this year. Moreover, the University of Michigan consumer confidence index slipped to 63.2 in August from 66.0 in the previous month amid expectations for a rise to 69.0, with chain-store sales falling for twelve consecutive months in July, and the weakening outlook for consumer spending may hamper the prospects for a sustainable recovery as private-sector spending accounts for more than two-thirds of the economy. Nevertheless, demands for U.S. durable goods surged 4.9% in during the same period, posting the biggest gain in two years, with construction spending unexpectedly tipping higher in June, and the extraordinary efforts taken on by the government may continue to soften the landing of the world’s largest economy. Fed Chairman Ben Bernanke held an improved outlook for future growth at the central bank summit, stating that the “prospects for a return to growth in the near term appear good.” At the same time, the central bank head went onto say that the recovery “is likely to be relatively slow at first, with unemployment declining only gradually from high levels” as businesses continue to take steps to lower their cost structure. As a result, the FOMC continued to reiterate borrowing costs will stay ‘exceptionally low’ for sometime and maintained its $1.75B in asset purchases to steer the nation out of recession however, as policy makers anticipate economic activity to improve throughout the second-half of the year, the rise in the interest rate outlook may drive the greenback higher in the months ahead. Nevertheless, as risk trends continue to dictate price action in the foreign exchange market, a rise in risk appetite could weigh on the reserve currency as investors move into higher yielding assets.
Trading the given event risk favors a bearish outlook for the greenback but nevertheless, as the central bank forecasts economic activity to contract at a slower pace in the second-half, price action following an enhanced GDP report could set the stage for a long dollar trade. Therefore, if the preliminary reading shows a contraction of 1.0% or less in the second quarter, we will look for a red, five-minute candle subsequent to 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 reasonable distance after taking volatility into account, and this risk will establish our first target. Our second target 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 order to preserve our profits.
In contrast, the slump in private spending paired with the rise in unemployment may continue to weigh on economic activity going forward, and a dismal GDP reading could spark a sell-off in the greenback as investors scale back long-term expectations for higher interest rates. As a result, if the growth rate contracts 1.5% or greater from the first quarter, 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.
Visit the DailyFX Forex Stream for Real-Time News and Market Updates
