Monday, 27 April 2009 11:51:25 GMT
Written by David Song, Currency Analyst
Full Article
Economic confidence in the Euro-Zone is expected to bounce back from a record-low reading in March as policymakers continue to take unprecedented steps to shore up the economy however, as the region faces its worst economic downturn in over half a century, fears of a deepening recession could weigh on household and business sentiment.
Trading the News: Euro-Zone Economic Confidence
What’s Expected
Time of release: 04/29/2009 09:00 GMT, 05:00 EST
Primary Pair Impact: EURUSD
Expected: 65.6
Previous: 64.6
Impact the Euro-Zone Economic Confidence has had on EURUSD over the last 2 months
March 2009 Euro-Zone Economic Confidence
Confidence in the Euro-Zone fell to a record-low of 64.6 from a revised reading of 65.3 in February amid expectations for a rise to 65.4, and deteriorating fundamentals are likely to reinforce fears of a deepening recession as OECD forecasts the economy to contract 4.1% and anticipates the unemployment rate to reach 10% this year. As households and business face the worst economic downturn in over half a century, policymakers have taken unprecedented steps to stimulate the ailing economy, and the European Central Bank is expected to lower borrowing costs further in the month ahead as the outlook for growth and inflation falter. Nevertheless, as ECB President Trichet remains reluctant to overshoot the overnight lending rate, market participants speculate that the central bank will utilize tools beyond the interest to manage monetary policy as they maintain at 2% target for price growth.
February 2009 Euro-Zone Economic Confidence
Economic sentiment in the Euro-Zone unexpectedly slipped to 65.4 from a revised reading of 67.2 in January, which is the lowest reading since recordkeeping began in 1985, and the data reinforces a dour outlook for the region as growth prospects deteriorate at a record pace. Weakening fundamentals paired with increased turmoil in the banking sector continues to weigh on households and business, and as the outlook for growth and inflation falter, fears of a deepening recession could lead the European Central Bank to step up their efforts as the region is expected to face its worst economic downturn since World War II. As a result, market participants anticipate the ECB to lower borrowing costs by another 50bp in March as households and businesses turn increasingly pessimistic towards the economy, and may adopt unconventional tools to stimulate the ailing economy as the interest rate falls close to zero.
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:
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.
How To Trade This Event Risk
Economic confidence in the Euro-Zone is expected to bounce back from a record-low reading in March as policymakers continue to take unprecedented steps to shore up the economy however, as the region faces its worst economic downturn in over half a century, fears of a deepening recession could weigh on household and business sentiment. Market participants speculate the rebound in the Sentix investor confidence survey paired with the first positive ZEW reading since July 2007 has instilled an improved outlook for the economy as the European Central Bank continues to lower borrow costs and adopts unconventional tools in an effort to stimulate the ailing economy however, as growth prospects deteriorate at a record pace, the economic outlook for the region remains bleak. Retail spending in February plunged 4.0% from the previous year to mark the biggest annual decline since comparable records began in 1996 as the unemployment rate surged to a three-year high of 8.5% from a revised reading of 8.3% in January, and the labor market is likely to weaken further as firms continue to scale back on production and employment in order to cut costs. A report by the European Union’s statistics office showed industrial outputs fell at an annual pace of 18.4% in February, which is the biggest decline since 1986, while new orders dropped at a record pace as demands slipped 34.5% from last year, and the outlook for growth and inflation remains bleak as the International Monetary Fund forecasts economic activity within the euro-region to contract 4.2% this year. Moreover, the IMF called upon the European Central Bank to take further action to shore up the region as the downturn in the global economy intensifies but, as ECB President Trichet remains reluctant to overshoot the interest rate while the Governing Council fails to meet on common ground, market participants have argued that the lack of decisive action will ultimately prolong a recovery, and speculate that policymakers may utterly fail to restore confidence in the global market as the fund projects European banks to write down another $750B in losses through the following year. Meanwhile, the central bank head countered the arguments and said that ‘we’ll do everything for the recovery’ expected later next year, but went onto say that the ECB ‘remains very cautions, very prudent,’ and went onto say that the G20 ‘pledges have to be implemented as rapidly as possible’ as the downside risks for global growth intensifies. As investors expect the ECB to put a floor on the interest rate next month, long-term expectations for higher interest rates could boost demands for the single-currency but nevertheless, as risk trends continue to dictate price action in the foreign exchange market, drop in market sentiment is likely to weigh on the exchange rate as the U.S. dollar benefits from safe-haven flows.
Trading the given event risk favors a bullish outlook for the euro as economists forecast economic sentiment in the Euro-Zone to bounce back from a record-low, and price action following the release could set the stage for a long euro-dollar trade . Therefore, an inline print or a rise above 65.6 would lead us to look for a green, five-minute candle following the event to confirm a buy entry on two-lots of EUR/USD, and once these conditions are met, we will place our initial stop at the nearby swing low (or reasonable distance), and this risk will determine our first target. Our second target will be based on discretion, and in an effort to preserve our profits, we will move the stop on the second lot to breakeven once the first trade reaches its target.
On the contrary, fears of a deepening downturn paired with tightening credit conditions are likely to weigh on households and businesses, and a drop in economic confidence would lead us to sell the euro as the outlook for growth and inflation falter. As a result, if the index falls to a fresh record low and drops below 64.0, we will favor a bearish forecast for the single currency following the release, and will implement the same setup for a short euro-dollar trade as the long position mentioned above, just in reverse.
DailyFX provides forex news on the economic reports and political events that influence the currency market. Learn currency trading with a free practice account and charts from FXCM.
Written by David Song, Currency Analyst
Full Article
Economic confidence in the Euro-Zone is expected to bounce back from a record-low reading in March as policymakers continue to take unprecedented steps to shore up the economy however, as the region faces its worst economic downturn in over half a century, fears of a deepening recession could weigh on household and business sentiment.
Trading the News: Euro-Zone Economic Confidence
What’s Expected
Time of release: 04/29/2009 09:00 GMT, 05:00 EST
Primary Pair Impact: EURUSD
Expected: 65.6
Previous: 64.6
Impact the Euro-Zone Economic Confidence has had on EURUSD over the last 2 months
March 2009 Euro-Zone Economic Confidence
Confidence in the Euro-Zone fell to a record-low of 64.6 from a revised reading of 65.3 in February amid expectations for a rise to 65.4, and deteriorating fundamentals are likely to reinforce fears of a deepening recession as OECD forecasts the economy to contract 4.1% and anticipates the unemployment rate to reach 10% this year. As households and business face the worst economic downturn in over half a century, policymakers have taken unprecedented steps to stimulate the ailing economy, and the European Central Bank is expected to lower borrowing costs further in the month ahead as the outlook for growth and inflation falter. Nevertheless, as ECB President Trichet remains reluctant to overshoot the overnight lending rate, market participants speculate that the central bank will utilize tools beyond the interest to manage monetary policy as they maintain at 2% target for price growth.
February 2009 Euro-Zone Economic Confidence
Economic sentiment in the Euro-Zone unexpectedly slipped to 65.4 from a revised reading of 67.2 in January, which is the lowest reading since recordkeeping began in 1985, and the data reinforces a dour outlook for the region as growth prospects deteriorate at a record pace. Weakening fundamentals paired with increased turmoil in the banking sector continues to weigh on households and business, and as the outlook for growth and inflation falter, fears of a deepening recession could lead the European Central Bank to step up their efforts as the region is expected to face its worst economic downturn since World War II. As a result, market participants anticipate the ECB to lower borrowing costs by another 50bp in March as households and businesses turn increasingly pessimistic towards the economy, and may adopt unconventional tools to stimulate the ailing economy as the interest rate falls close to zero.
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:
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.
How To Trade This Event Risk
Economic confidence in the Euro-Zone is expected to bounce back from a record-low reading in March as policymakers continue to take unprecedented steps to shore up the economy however, as the region faces its worst economic downturn in over half a century, fears of a deepening recession could weigh on household and business sentiment. Market participants speculate the rebound in the Sentix investor confidence survey paired with the first positive ZEW reading since July 2007 has instilled an improved outlook for the economy as the European Central Bank continues to lower borrow costs and adopts unconventional tools in an effort to stimulate the ailing economy however, as growth prospects deteriorate at a record pace, the economic outlook for the region remains bleak. Retail spending in February plunged 4.0% from the previous year to mark the biggest annual decline since comparable records began in 1996 as the unemployment rate surged to a three-year high of 8.5% from a revised reading of 8.3% in January, and the labor market is likely to weaken further as firms continue to scale back on production and employment in order to cut costs. A report by the European Union’s statistics office showed industrial outputs fell at an annual pace of 18.4% in February, which is the biggest decline since 1986, while new orders dropped at a record pace as demands slipped 34.5% from last year, and the outlook for growth and inflation remains bleak as the International Monetary Fund forecasts economic activity within the euro-region to contract 4.2% this year. Moreover, the IMF called upon the European Central Bank to take further action to shore up the region as the downturn in the global economy intensifies but, as ECB President Trichet remains reluctant to overshoot the interest rate while the Governing Council fails to meet on common ground, market participants have argued that the lack of decisive action will ultimately prolong a recovery, and speculate that policymakers may utterly fail to restore confidence in the global market as the fund projects European banks to write down another $750B in losses through the following year. Meanwhile, the central bank head countered the arguments and said that ‘we’ll do everything for the recovery’ expected later next year, but went onto say that the ECB ‘remains very cautions, very prudent,’ and went onto say that the G20 ‘pledges have to be implemented as rapidly as possible’ as the downside risks for global growth intensifies. As investors expect the ECB to put a floor on the interest rate next month, long-term expectations for higher interest rates could boost demands for the single-currency but nevertheless, as risk trends continue to dictate price action in the foreign exchange market, drop in market sentiment is likely to weigh on the exchange rate as the U.S. dollar benefits from safe-haven flows.
Trading the given event risk favors a bullish outlook for the euro as economists forecast economic sentiment in the Euro-Zone to bounce back from a record-low, and price action following the release could set the stage for a long euro-dollar trade . Therefore, an inline print or a rise above 65.6 would lead us to look for a green, five-minute candle following the event to confirm a buy entry on two-lots of EUR/USD, and once these conditions are met, we will place our initial stop at the nearby swing low (or reasonable distance), and this risk will determine our first target. Our second target will be based on discretion, and in an effort to preserve our profits, we will move the stop on the second lot to breakeven once the first trade reaches its target.
On the contrary, fears of a deepening downturn paired with tightening credit conditions are likely to weigh on households and businesses, and a drop in economic confidence would lead us to sell the euro as the outlook for growth and inflation falter. As a result, if the index falls to a fresh record low and drops below 64.0, we will favor a bearish forecast for the single currency following the release, and will implement the same setup for a short euro-dollar trade as the long position mentioned above, just in reverse.
DailyFX provides forex news on the economic reports and political events that influence the currency market. Learn currency trading with a free practice account and charts from FXCM.