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

Trading the News: U.S. Consumer Confidence

What’s Expected:

Time of release: 11/29/2011 15:00 GMT, 10:00 EST

Primary Pair Impact: EURUSD

Expected: 44.0

Previous: 39.8

DailyFX Forecast: 42.0 to 45.0

Why Is This Event Important:

The Conference Board’s Consumer Confidence survey is expected to bounce back from a two-year low in November, and the rebound in household sentiment could spark a bullish reaction in the U.S. dollar as the data highlights an improved outlook for the world’s largest economy. As growth prospects pick up, the Federal Reserve may see limited scope to conduct another round of quantitative easing, and we may see the central bank conclude its easing cycle as Fed officials expect economic activity to gradually gather pace in the following year. However, the FOMC may keep the door open to expand monetary policy further in order to combat the ongoing weakness within the private sector, and Chairman Ben Bernanke may continue to strike a dovish outlook for monetary policy as the central bank preserves its dual mandate to ensure price stability while fostering full-employment. Nevertheless, trading the outcome may not be as clear cut as our previous trades as risk trends continue to dictate price action in the foreign exchange market, and we may see an inverted reaction as market participants treat the USD as a safe-haven.

Recent Economic Developments

The Upside

The Downside

The pickup in wage growth paired with the expansion in consumer credit should help to prop up household sentiment, and a positive development may lead the EUR/USD to threaten the rebound from 1.3145 as the fundamental outlook for the world’s largest economy improves. However, the slowdown in private sector consumption paired with the protracted recovery in the labor market does not bode well for consumer confidence, and we may see Americans turn increasingly pessimistic towards the economy as the central bank maintains a cautious outlook for the region. In turn, a dismal confidence report could fuel the short-term rebound in the EUR/USD, and the exchange rate may threaten the downward trend from earlier this month as market participants increase bets for QE3.

Potential Price Targets For The Release

How To Trade This Event Risk

Expectations for a rebound in household sentiment casts a bullish outlook for the greenback, and the market reaction could set the stage for a long U.S. dollar trade as the fundamental outlook improves. Therefore, if the survey advances to 44.0 or higher in November, we will need to see a red, five-minute candle subsequent to 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 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 breakeven once the first trade reaches its mark in an effort to lock-in our winning.

On the other hand, we may see households turn increasingly pessimistic towards the economy in light of the ongoing weakness within the real economy, and the USD may trade heavy over the next 24-hours of trading should the data highlight a dour outlook for future growth. As a result, should we see the Conference Board’s survey fall short of market expectations, we will look to 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. Consumer Confidence survey has had on USD during the last month

October 2011 U.S. Consumer Confidence

The gauge for U.S. consumer confidence weakened to 39.8 in October to mark the lowest reading since March 2009, and the data casts a weakened outlook for the world’s largest economy as private sector spending remains one of the leading drivers of growth. A deeper look at the report showed the gauge for future expectations falling back to 48.7 from 55.1 in September, and we may see household turn increasingly pessimistic towards the economy as the slowing recovery heightens the risk of a double-dip recession. As the outlook for growth and inflation deteriorates, the Federal Reserve may extend its easing cycle into the following year, but we may see the FOMC talk down speculation for another round of quantitative easing as Fed officials expect economic activity to gather pace over the coming months. The initial reaction to the dismal confidence report was short-lived, with the EUR/USD climbing back above 1.3900, but we saw the the exchange rate hold consolidate going into the end of the day as the pair closed at 1.3905.

--- Written by David Song, Currency Analyst

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

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