FX - EUR/USD: Trading the U.S. Durable Goods Orders Report

Trading the News: U.S. Durable Goods Orders

What’s Expected:

Time of release: 08/24/2011 12:30 GMT, 8:30 EST

Primary Pair Impact: EURUSD

Expected: 2.0%

Previous: -2.1

DailyFX Forecast: 1.5% to 2.5%

Why Is This Event Important:

Orders for U.S. durable goods are expected to increase 2.0% in July after unexpectedly contracting during the previous month, and the rebound could spark a bullish reaction in the exchange rate as the data reinforces an improved outlook for future growth. As the Federal Reserve anticipates the economic recovery to gather pace over the coming months, the central bank may show an increased willingness to preserve its current policy throughout the remainder of the year, and Chairman Ben Bernanke may talk down speculation for another round of quantitative easing as inflation continues to hold above the 2% target.

At the same time, the heightening risk for a double-dip recession may encourage the FOMC to expand monetary policy further, and the committee may show an increased willingness to further support the real economy in an effort to promote a sustainable recovery. However, as risk sentiment continues to dictate price action in the currency market, a positive development could spur an inverse reaction, and market participants may move out of the USD as they increase their appetite for yields.

Recent Economic Developments

The Upside

The Downside

The expansion in consumer credit paired with the faster pace of wage growth should help to shore up domestic demands, and a rise in U.S. durable goods should help to instill a bullish outlook for the greenback as the recovery picks up. However, higher prices paired with the slowdown in economic activity may dampen private sector spending, and a dismal report could weigh on the USD as the region faces an increased risk of slipping back into a recession. In turn, the Fed may step up its efforts to stimulate the ailing economy, and Chairman Bernanke may show an increased willingness to conduct another round of quantitative easing at the Jackson Hole Economic Policy Symposium scheduled for later this week.

Potential Price Targets For The Release

How To Trade This Event Risk

Expectations for a rebound in U.S. durable goods reinforces a bullish outlook for the reserve currency, and the market reaction could pave the way for a long U.S. dollar trade as growth prospects improve. Therefore, if demands increase by 2.0% or greater in July, we will need a red, five-minute candle following the release to generate a sell entry on two-lots of EUR/USD. Once these conditions are fulfilled, we will set the initial stop at the nearby swing high or a reasonable distance from the entry, and this risk will establish our first target. The second objective 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 order to preserve our profits.

In contrast, the report may disappoint for the second-month as households and businesses cope with higher prices, and another unexpected decline is likely to instill a bearish outlook for the greenback as growth prospects deteriorate. As a result, if orders increase less than 1.0% from the previous month, we will carry out the same setup for a long euro-dollar trade as the long position mentioned above, just in reverse.

Impact that the U.S. Durable Goods Orders report has had on USD during the last month

June 2011 U.S. Durable Goods Orders

Demands for U.S. durable goods unexpectedly fell 2.1% in June, while orders excluding transportation equipment increased 0.1% amid forecasts for a 0.5% expansion. A deeper look at the report showed orders for non-defense capital goods excluding aircrafts, which acts as a gauge for businesses investments, fell 0.4% following a revised 1.7% expansion in May, while inventories increased 0.4% during the same period to mark the slowest pace of growth in a year. The recent development certainly highlights a weakened outlook for the world’s largest economy as private sector consumption remains one of the leading drivers of growth, and the Federal Reserve take additional steps to support the real economy as it aims to encourage a sustainable recovery. Market participants showed a mixed reaction to the data, with the EUR/USD retracing the decline ahead of the release, but the reserve currency gained ground throughout the North American trade as the exchange rate ended the day at 1.4368.

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