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Trading the News: U.S. Gross Domestic Product (GDP)

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by , 06-25-2014 at 10:01 AM (776 Views)
      
   
Quote Originally Posted by TheNews View Post
- U.S. Final 1Q GDP Print to Show Another Downward Revision/Larger Contraction.
- 1.8% Decline Would Mark the Biggest Drop Since 1Q 2009 (-5.4%).

Trading the News: U.S. Gross Domestic Product (GDP)

The final 1Q Gross Domestic Product (GDP) report may heighten the bearish sentiment surrounding the U.S. dollar as market participants anticipate another downward revision in the growth rate.

What’s Expected:


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Why Is This Event Important:

A more meaningful decline in the growth rate may spark a bearish reaction in the greenback (bullish EUR/USD) as it gives the Federal Reserve greater scope to retain its highly accommodative policy stance, and the reserve currency may face additional headwinds throughout the summer months as central bank Chair Janet Yellen continues to endorse a dovish tone for monetary policy.


Expectations: Bearish Argument/Scenario

Release Expected Actual
Building Permits (MoM) (MAY) -0.9% -6.4%
Housing Starts (MoM) (MAY) -3.9% -6.5%
ISM Manufacturing (MAY) 55.5 55.4

The ongoing slack in business outputs paired with the slowdown in housing activity may prompt a larger-than-expected decline in 1Q GDP, and a dismal print may generate a more meaningful rebound in the EUR/USD as the data drags on interest rate expectations.

Risk: Bearish Argument/Scenario

Release Expected Actual
Consumer Credit (APR) $15.000B $26.847B
Change in Non-Farm Payrolls (MAY) 215K 217K
Durable Goods Orders (APR) -0.7% 0.8%

However, stronger job growth along with the pickup in private sector credit may have helped to limit the downturn in economic activity, and a positive development may generate a bullish outlook for the greenback as it puts increased pressure on the Fed to normalize monetary policy sooner rather than later.

How To Trade This Event Risk

Bearish USD Trade: U.S. 1Q GDP Contracts 1.8% or Greater

  • Need green, five-minute candle following the GDP print to consider a long EUR/USD trade
  • If market reaction favors a bearish dollar trade, long EUR/USD with two separate position
  • Place stop at the near-by swing low/reasonable distance from entry; look for at least 1:1 risk-to-reward
  • Move stop to entry on remaining position once initial target is hit, set reasonable limit

Bullish USD Trade: Growth Rate Exceeds Market Expectations

  • Need red, five-minute candle to favor a short EUR/USD trade
  • Implement same setup as the bearish dollar trade, just in opposite direction


Potential Price Targets For The Release
EUR/USD Daily

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  • Continues to Threaten Trendline Resistance; Bullish Breakout Brings Up June High (1.3676)
  • Interim Resistance: 1.3650 (78.6% expansion) to 1.3670 (61.8% retracement)
  • Interim Support: 1.3490 (50.0% retracement to 1.3500 Pivot


Impact that U.S. GDP has had on EUR/USD during the last quarter

Period Data Released Estimate Actual Pips Change
(1 Hour post event )
Pips Change
(End of Day post event)
4Q F 2014 03/27/2014 12:30 GMT 2.7% 2.6% +10 -18


The final 4Q GDP report showed an upward revision in the growth rate as the U.S. economy expanded an annualized 2.6% amid an initial forecast of 2.4%. The greenback struggled to hold its ground following the release as the EUR/USD climbed towards the 1.3775 region, but the dollar regained its footing during the North American trade, with the pair ending the day at 1.3739.

--- Written by David Song, Currency Analyst

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