FX - EUR/USD: Trading the U.S. Consumer Confidence Survey

Trading the News: U.S. Consumer Confidence

What’s Expected:

Time of release: 04/26/2011 14:00 GMT, 10:00 EST

Primary Pair Impact:EURUSD

Expected: 64.5

Previous: 63.4

DailyFX Forecast: 62.0 to 65.0

Why Is This Event Important:

Household confidence in the world's largest economy is anticipated to gather pace in April, with market participants forecasting the Conference Board’s index to increase to 64.5 from 63.4 in the previous month, and a rebound in consumer sentiment should spark a bullish reaction in the U.S. dollar as it reinforces an improved outlook for private consumption. As personal spending remains one of the leading drivers of growth, expectations for a rise in economic activity could heighten speculation for higher borrowing costs in 2011, and the Federal Reserve may see scope to gradually normalize monetary policy in the second-half of the year as policy makers see the recovery on a firmer footing. However, as the Fed continues to highlight the ongoing weakness within the real economy, the central bank may keep the benchmark interest rate close to zero for most of the year as it aims to encourage a sustainable recovery.

Recent Economic Developments

The Upside

The Downside

As employment picks up, with consumer credit conditions improving, the ongoing expansion in private sector activity should help to prop up household sentiment as the central bank continues to raise its fundamental assessment for the nation. However, as households cope with higher energy costs paired with subdued wage growth, consumer confidence may wane further over the coming months, and the central bank may continue to carry out the additional $600B in quantitative easing in an effort to strengthen the recovery. As a result, the FOMC is likely to maintain a neutral tone for monetary policy at its next rate decision on April 27 as the fundamental outlook remains clouded with high uncertainty.

Potential Price Targets For The Release

How To Trade This Event Risk

Expectations for a rebound in household sentiment certainly reinforces a bullish outlook for greenback, and the market reaction to the confidence report could pave the way for a long U.S. dollar trade as growth prospects improve. Therefore, if the Conference Board’s index advances to 64.5 or higher in April, we will need a red, five-minute candle subsequent to 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 after taking market volatility into account, 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 order to protect our profits.

In contrast, consumer confidence may deteriorate further given the ongoing slack within the real economy, and an unexpected drop in household sentiment could bear down on the exchange rate as the outlook for future growth falters. As a result, if the survey holds flat from the previous month or falls back from 63.4, we will implement the same strategy for a long euro-dollar trade as the short position laid out above, just in the opposite direction.

Impact that the U.S. Existing Home Sales report has had on USD during the last month

March 2011 U.S. Consumer Confidence

The Conference Board’s gauge for consumer confidence slipped to a three-month low of 63.4 in March from a revised 72.0 in the previous month, and household sentiment may deteriorate further over in the first-half of the year as Americans cope rising energy costs paired with a depressed housing market. A deeper look at the report showed planned consumption of large ticket items generally weakened across the board, with the index for anticipated auto purchases falling back to 10.9 from 12.8 in February, while consumer inflation expectations for the next 12-months increased to 6.7% from 5.6% during the same period to mark the highest reading since October 2008. As the risk for inflation intensifies, the Federal Reserve may see scope to lift the benchmark interest rate off the record-low in the second-half of the year, but the central bank may look to support the real economy for most of 2011 as it aims to encourage a sustainable recovery. Indeed, the drop in sentiment sparked a bearish reaction in the greenback, with the EUR/USD working its way towards 1.4100, and the dollar continued to lose ground throughout the North American trade as the exchange rate ended the day at 1.4111.

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