FX - EUR/USD: Trading the 3Q German GDP Report

Trading the News: German GDP

What’s Expected:

Time of release: 11/15/2011 7:00 GMT, 2:00 EST

Primary Pair Impact: EURUSD

Expected: 0.5%

Previous: 0.1%

DailyFX Forecast: 0.1% to 0.5%

Why Is This Event Important:

Market participants see Europe’s largest economy expanding 0.5% in the third-quarter, and the faster rate of growth should spark a bullish reaction in the single currency as the data encourages an improved outlook for the region. As the recovery gradually gathers pace, the development may encourage the European Central Bank to carry a wait-and-see approach into 2012, and we may see the Governing Council talk down speculation for additional monetary support following the rate cut from earlier this month. However, as ECB officials see the euro-area falling back into a recession, the central bank may take additional steps to stimulate the ailing economy, and the committee may extend its easing cycle into the following year in an effort to balance the downside risks for the region.

Recent Economic Developments

The Upside

The Downside

As businesses in Germany continue to benefit from the expansion in global trade, a rise in net exports should help to prop up economic activity, and an above-forecast GDP print may lead the EUR/USD to pare the decline from earlier this week as the fundamental outlook for Europe improves. However, the slowdown in private sector consumption paired with the renewed weakness in the labor market may lead to a dismal growth report, and a dismal GDP figure is likely to weigh on the exchange rate as market participants raise bets for lower borrowing costs. In turn, we may see the head-and-shoulders top in the EUR/USD play out in the coming days, and the exchange rate may threaten the rebound from 1.3145 as investors increase bets for additional monetary support.

Potential Price Targets For The Release

How To Trade This Event Risk

Expectations for a faster rate of growth instills a bullish bias for the single currency, and the market reaction could set the stage for a long euro trade as the data casts an improved outlook for the region. Therefore, if GDP expands 0.5% or greater in the third-quarter, we will need to see a green, five-minute candle subsequent to the release to establish a long entry on two-lots of EUR/USD. Once these conditions are fulfilled, 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 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 an effort to lock-in our profits.

In contrast, the slowdown in private sector activity paired with the ongoing turmoil within the financial system may bear drag on GDP, and a dismal growth report could trigger a sharp selloff in the exchange rate as market participants increase bets for additional monetary support. As a result, if the growth rate expands less than 0.3%, we will carry out the same setup for a short euro-dollar trade as the long position laid out above, just in reverse.

Impact that German GDP has had on EUR during the last quarter

2Q 2011 German Gross Domestic Product

Economic activity in Germany increased 0.1% in the third-quarter after expanding 1.3% during the first three-months of the year, and the slowdown in Europe’s largest economy certainly casts a dour outlook for the region as it leads the recovery in the euro-area. The report showed net exports dragging on GDP as imports exceeded foreign demands, while private sector consumption and construction also weighed on economic activity according to the statement by the Federal Statistics Office. As the fundamental outlook for the euro-area deteriorates, we may see the European Central Bank soften its hawkish tone for monetary policy, and the Governing Council may turn increasingly cautious towards the economy as the region faces a growing risk of a double-dip recession. The dismal GDP report weighed on the exchange rate, with the EUR/USD slipping back below 1.4400, but the single currency regained its footing throughout the day to close at 1.4407.

--- Written by David Song, Currency Analyst

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

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