FX - EUR/USD: Trading the German Unemployment Report

Trading the News: German Unemployment Change

What’s Expected:

Time of release: 09/29/2011 7:55 GMT, 3:55 EST

Primary Pair Impact: EURUSD

Expected: -8K

Previous: -8K

DailyFX Forecast: -10.0K to 5.0K

Why Is This Event Important:

Unemployment in Germany is projected to fall another 8K in September and the ongoing recovery in the labor market may help to prop up the Euro as it encourages an improved outlook for future growth. As private sector activity gathers pace, the European Central Bank may raise its economic assessment for the region, and the Governing Council may endorse a wait-and-see approach throughout the remainder of the year in an effort to balance the risks for the region.

However, the heightening risk for contagion paired with the ongoing turmoil within the financial system may encourage the ECB to provide additional monetary support, and the central bank may scale back the rate hikes from earlier this year as the region faces an increased risk of a double-dip recession. According to Credit Suisse overnight index swaps, market participants are pricing a 25bp rate cut for the October 6 policy meeting, and the central bank may also discuss expanding its nonstandard measures as the sovereign debt crisis takes a toll on the real economy.

Recent Economic Developments

The Upside

The Downside

Easing price pressures across the euro-area may give businesses an opportunity to further expand their labor force, and a positive employment report may push the EUR/USD back towards the 61.8% Fibonacci retracement from the 2009 high to the 2010 low around 1.3880-1.3900 as it reinforces an improved outlook for future growth. However, the slowdown in global trade paired with the lower rate of production dampens the outlook for employment, and businesses may scale back on hiring as the fundamental outlook for Europe remains clouded with high uncertainty. In turn, the near-term rally in the EUR/USD may give out, and the exchange rate may threaten the rally from earlier this year (1.2873) as growth prospects deteriorate.

Potential Price Targets For The Release

How To Trade This Event Risk

As unemployment is expected to contract for 26 consecutive months in August, the recovery in the labor market could set the stage for a long Euro trade as the data highlights an improved outlook for Europe’s largest economy. Therefore, if unemployment falls 8K or more from the previous, we will need to see a green, five-minute candle following the report to generate a buy entry for two-lots of EUR/USD. Once these conditions are met, we will set the initial stop at the nearby swing low or a reasonable distance from the entry, and this risk will establish our first objective. The second target will be based on discretion, and we will move the stop on the second lot to cost once the first trade reaches its mark in an effort to protect our winnings.

On the other hand, slowdown in global trade paired with the heightening risk of a double-dip recession may lead businesses to scale back on hiring, and a dismal labor report could weigh on the exchange rate as growth prospects deteriorate. As a result, if unemployment unexpectedly increases from the previous month, we will implement the same strategy for a short euro-dollar trade as the long position mentioned above, just in the opposite direction.

Impact that the German Unemployment report has had on EUR during the last month

August 2011 German Unemployment Change

Unemployment in Germany slipped 8K in August following the 10K decline in the previous month, while the jobless rate held steady at 7.0% for the third consecutive month. Indeed, the ongoing recovery in the labor market highlights an improved outlook for Europe’s largest economy, and the central bank may continue to normalize monetary policy as it maintains its one and only mandate to ensure price stability. However, the slowdown in economic activity paired with the heightening risk for contagion may encourage the European Central Bank to keep the benchmark interest rate at 1.50% throughout the remainder of the year, and central bank President Jean-Claude Trichet may continue to soften his hawkish tone for monetary policy as the sovereign debt crisis dampens the fundamental outlook for the euro-area. The EUR/USD advanced to a high of 1.4468 immediately following the release, but the single-currency struggled to hold its ground throughout the day as the exchange rate settled at 1.4370 at the end of the day.

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To discuss this report contact David Song, Currency Analyst: dsong@dailyfx.com