FX - EUR/USD: Trading the German IFO Business Confidence Survey

Trading the News: German IFO Survey (Expectations)

What’s Expected:

Time of release: 11/24/2011 9:00 GMT, 4:00 EST

Primary Pair Impact: EURUSD

Expected: 96.0

Previous: 97.0

DailyFX Forecast: 95.0 to 96.0

Why Is This Event Important:

The German IFO business confidence survey is anticipated to weaken for the fourth consecutive month in November, while market participants see the gauge for future expectations falling back to 96.0 from 97.0 in the previous month. As the data instills a weakened outlook for future growth, the development is likely to weigh on the exchange rate, and we may see the European Central Bank expand monetary policy further as the euro-area is expected to face a ‘mild recession.’ However, as the appears to be a growing rift within the Governing Council, the ECB may look to carry its current policy into the following year, and the central bank may continue to move away from its nonstandard measures as its asset purchase program comes under increased scrutiny.

Recent Economic Developments

The Upside

The Downside

Easing input costs paired with the rebound in consumer confidence could spur a rise in business sentiment, and an unexpected rise in the IFO survey could spark a relief rally in the EUR/USD as the data encourages an improved outlook for Europe’s largest economy. However, the slowdown in private sector consumption paired with fears of a deep recession may weigh on business confidence, and a larger-than-expect drop in the index could heighten the bearish sentiment underlying the single currency as growth prospects deteriorate. In turn, we may see the EUR/USD may extend the selloff from 1.4246, and the exchange rate may threaten the rebound from 1.3145 as the fundamental outlook for the region turns increasing bleak.

Potential Price Targets For The Release

How To Trade This Event Risk

Expectations for a drop in the IFO survey casts a bearish outlook for the single currency, but an above-forecast print could pave the way for a long Euro trade as it raises the prospects for future growth. Therefore, if the IFO index holds steady from the previous month or unexpectedly increased from the previous month, we will need to see a green, five-minute candle following the release to establish a buy entry on two-lots on 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 generate 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 order to protect our profits.

In contrast, business optimism may deteriorate further in October as the slowing recovery raises the threat of a double-dip recession, and the weakening outlook for the euro-area may lead the ECB to carry its easing cycle into the following year as it aims to balance the risks for the region. As a result, if the gauge for future expectations slips to 96.0 or lower from the previous month, we will implement the same strategy for a short euro-dollar trade as the long position mentioned above, just in reverse.

Impact that the German IFO Business Confidence survey has had on EUR during the last month

October 2011 German IFO Survey (Expectations)

Business confidence in German slipped to a 16-month low in October, while the gauge for future expectations weakened to 97.0 from a revised 97.9 in the previous month to mark the lowest reading since July 2009. As the slowing recovery in Europe heightens the risk of a double-dip recession, firms may turn increasingly pessimistic towards the economy, and we may see the European Central Bank continue to soften its hawkish tone for monetary policy as the fundamental outlook for the euro-area turns increasingly bleak. As the sovereign debt crisis drags on the real economy, the ECB may look to expand its nonstandard measures, but the Governing Council may target the benchmark interest rate as the governments operating under the monetary union become increasingly reliant on the central bank’s nonstandard measures. The Euro struggled to hold its ground following the release, with the EUR/USD slipping to a fresh daily low of 1.3703, but we saw the single currency quickly regain its footing to end the day at 1.3890.

--- Written by David Song, Currency Analyst

To contact David, e-mail dsong@dailyfx.com. Follow me on Twitter at @DavidJSong

To be added to David's e-mail distribution list, send an e-mail with subject line "Distribution List" to dsong@dailyfx.com.

Questions? Comments? Join us in the DailyFX Forum

View the Expo Presentation on ‘Trading the News’ For Additional Resources