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

Trading the News: German IFO Business Confidence - Expectations

What’s Expected:

Time of release: 02/21/20119:00 GMT, 4:00 EST

Primary Pair Impact : EURUSD

Expected: 107.5

Previous: 107.8

DailyFX Forecast: 106.0 to 108.0

Why Is This Event Important:

Business confidence in Germany is expected to fall back from a record-high in February, with market participants forecasting the IFO survey to weaken to 107.5 from 107.8 in the previous month, and the drop in sentiment could bear down on the exchange rate as investors weigh the outlook for future growth. As business sentiment falters, the data is likely to spark a bearish reaction in the euro, and the near-term rally in the EUR/USD could be short-lived as growth prospects deteriorate. In turn, we are likely to see the European Central Bank support the real economy as the region copes with an uneven recovery, and the Governing Council may retain its currency policy throughout the first-half of the year in an effort to balance the risks for the euro-area.

Recent Economic Developments

The Upside

The Downside

As firms increase their willingness to expand their labor force , the recent rise in business sentiment could gather pace in 2011, and an unexpected advance in the IFO survey could brighten the outlook for future growth as the recovery gathers pace. However, as the marked expansion in economic activity cools, with households scaling back on consumption, firms may curb their growth outlook given the ongoing slack within the private sector. In turn, we may see the IFO survey come off of a record-high in February, and the data could spur a near-term correction in the EUR/USD following the three-day rally.

Potential Price Targets For The Release

How To Trade This Event Risk

Trading the given event risk certainly favors a bullish outlook for the single-currency, but another unexpected rise in business confidence could set the stage for a long euro trade as growth prospects improve. Therefore, if the survey for future expectations advances to 108.0 or higher in February, we will need a green, five-minute candle subsequent to the data to establish a buy 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 objective. The second target will be based on discretion, and we will move the stop on the second lot to breakeven once the first trade reaches its mark in order to preserve our profits.

In contrast, firms may curb their outlook for future growth given the ongoing weakness within the private sector paired with the slowdown in global trade, and a marked decline in business confidence could trigger a selloff in the euro as the rebound in economic activity cools. As a result, if the IFO survey falls back to 106.0 or lower from the previous month, we will carry out the same setup for a short euro-dollar trade as the long position mentioned above, just in reverse.

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

January 2011 German IFO Survey – Expectations

Business confidence in Germany advanced to a record high in January, with the IFO survey rising to 110.3 from a revised 109.8 in December, while the gauge for future expectations climbed to 107.8 from 106.8 during the same period to mark the highest reading since the series began in 1991. As firms raise their outlook for future growth, business may continue to increase production and employment over the coming months, and the rebound in economic activity may gather pace throughout 2011 as the region benefits from the marked expansion in global trade. However, as the euro-area faces an uneven recovery, the European Central Bank may look to support the real economy throughout the first-half of the year, and the Governing Council may continue to delay its exit strategy as the governments operating under the fixed-exchange rate system struggle to manage their public finances. Nevertheless, the EUR/USD advancing to a high of 1.3567 immediately following the release, and the euro ended the day on an even brighter note as it close at 1.3614.

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