FX - EUR/USD: Trading the Preliminary U.S. 4Q GDP Report

Trading the News: U.S. Preliminary GDP Report

What’s Expected:

Time of release: 02/25/201113:30 GMT, 8:30 EST

Primary Pair Impact:EURUSD

Expected: 3.3%

Previous: 3.2%

DailyFX Forecast: 3.3% to 3.5%

Why Is This Event Important:

The preliminary GDP report is expected to show economic activity increasing at an annualized pace of 3.3% in the fourth quarter amid an initial forecast for a 3.2% expansion in the growth rate, and the upward revision could generate a bullish reaction in the greenback as the recovery gathers pace. However, personal consumption is anticipated to widen 4.2% during the same period despite earlier projections for a 4.4% rise, and the mixed batch of data could spur choppy/mixed price action in the currency market as private sector spending accounts for more than two-thirds of the real economy. As households continue to cope with depressed property prices paired with the protracted recovery in the labor market, the Federal Reserve is likely to retain its wait-and-see approach throughout the first-half of the year, and the central bank may see scope to expand monetary policy further over the coming months as it aims to stem the downside risks for growth and inflation.

Recent Economic Developments

The Upside

The Downside

As businesses continue to increase their rate of production, with consumer credit expanding throughout the fourth-quarter, the rise in private sector activity could generate an enhanced GDP report as the economic recovery gathers pace. However, as employment remains subdued, with households scaling back on consumption, the weak spots in the real economy could produce a sharp downward revision in the preliminary figures as private sector spending remains one of the leading drivers of growth. In turn, the Fed is likely to carry out the $600B expansion in quantitative easing over the coming months, and the central bank keep the benchmark interest rate the record-low throughout the year as the fundamental outlook remains clouded with high uncertainty.

Potential Price Targets For The Release

How To Trade This Event Risk

Trading the given event risk is certainly not as clear cut as some of our previous trades as we expect to see a mixed batch of economic releases, but an upward revision in the growth rate could set the stage for a long U.S. dollar trade as the recovery gathers pace. Therefore, if GDP expands 3.3% or greater in the fourth quarter, we will need a red, five-minute candle following the release to establish 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 reasonable distance after taking market volatility into account, 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 an effort to protect our profits.

On the other hand, the substantial margin of slack within the private sector paired with the ongoing weakness in employment could bear down on the recovery, and the growth report may fail to meet market expectations as market participants expect to see a downward revision in personal spending. Therefore, if the growth rate expands less than 3.2% during the last three-months of 2010, we will implement the same strategy for a long euro-dollar trade as the short position laid out above, just in reverse.

Impact that U.S. GDP report has had on USD during the last quarter

3Q U.S. Preliminary GDP

The preliminary GDP report showed economic activity in the U.S. expanded at an annualized pace of 2.5% in the third quarter amid an initial projection for a 2.0% rise in the growth rate, while personal consumption advanced 2.8% during the same period to mark the fastest pace of growth since the first-three months of 2006. As private sector consumption accounts for more than two-thirds of the economy, the rise in spending certainly encourage an improved outlook for futures growth, and conditions should continue to pick up over the medium-term as policy makers take extraordinary steps to stimulate the ailing economy. However, as the housing market remains depressed, with the labor market facing a protracted recovery, the central bank may see scope to expand monetary policy further over the coming months as it aims to stem the downside risks for growth and inflation. The U.S. dollar showed a bullish reaction to the data, with the EUR/USD extending the decline from the overnight trade, and the pair ended the trading session at two-month low of 1.3370.

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