FX - EUR/USD: Trading the U.S. Durable Goods Orders Report

Trading the News: U.S. Durable Goods Orders

What’s Expected:

Time of release: 11/23/2011 13:30 GMT, 8:30 EST

Primary Pair Impact: EURUSD

Expected: -1.2%

Previous: -0.8%

DailyFX Forecast: -1.0% to 0.5%

Why Is This Event Important:

Orders for U.S. durable goods are projected to contract another 1.2% in October after falling 0.8% in the previous month, and the downturn in private sector demands are likely to dampen the outlook for the world’s largest economy as consumption remains one of the leading drivers of growth. As the slowing recovery raises the risk of a double-dip recession, the Federal Reserve may keep the door open to expand monetary policy further, and the central bank may talk up speculation for another round of quantitative easing as it pledges to carry the zero interest rate policy through 2013. However, as Fed officials expect economic activity to gradually gather pace over the coming months, there appears to be a growing rift within the FOMC, and the committee may uphold a wait-and-see approach over the medium-term should growth prospects improve. Nevertheless, the reaction may not be as clear cut as some of our previous trades as market sentiment continues to dictate price action for the major currencies, and a drop in durable goods may weigh on risk-taking behavior, which would increase the appeal of the USD.

Recent Economic Developments

The Upside

The Downside

The ongoing expansion in household spending paired with the rebound in consumer confidence certainly bodes well for durable goods, and a positive report could spark a bullish reaction in the greenback, which could lead the EUR/USD to break down from its current range. However, the stickiness in price growth paired with the slowdown in private wages may weigh on consumption, and we may see the FOMC turn increasingly cautious towards the economy as the fundamental outlook remains clouded with high uncertainty. In turn, the short-term rebound in the EUR/USD may gather pace over the next 24-hours of trading, and the exchange rate may make another run at the 20-Day SMA (1.3712) to test for resistance.

Potential Price Targets For The Release

How To Trade This Event Risk

Slowing demands for U.S. durable goods instills a bearish bias for the greenback, but an above-forecast print could set the stage for a long U.S. dollar trade should the data highlight an improved outlook for the world’s largest economy. Therefore, if orders fall less than 0.2% or unexpectedly expand from the previous month, 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 met, we will set the initial stop at the nearby swing high or a reasonable distance from the entry, 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 breakeven once the first trade reaches its mark in an effort to protect our profits.

In contrast, a sharp decline in private sector demands could heighten the risk of a double-dip recession, and a dismal report may lead the FOMC to talk up speculation for additional monetary as the central bank aims to encourage a sustainable recovery. As a result, if orders fall by 1.2% or greater in October, we will look to carry out 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. Durable Goods Orders report has had on USD during the last month

September 2011 U.S. Durable Goods Orders

Demands for U.S. durable goods slipped 0.8% in September after increasing a revised 0.1% in the previous month, while orders excluding transportation equipment advanced 1.7% during the same period to mark the fastest pace of growth since March. The breakdown of the report showed demands for transportation equipment fell 7.5% during the month, while non-defense capital goods orders excluding aircrafts, which acts as a proxy for business investments, increased another 2.4% during the same period after rising 0.5% in August. As the details highlight an improved outlook for future growth, we may see the Federal Reserve soften its dovish tone for monetary policy, and the central bank may carry its current policy into the following year as Fed officials expect the economic recovery to gradually gather pace over the coming months. Although the initial reaction was fairly muted, we saw the EUR/USD slip below 1.3900, but the greenback struggled to hold its ground during the North American trade as the exchange rate settled at 1.3905 at the end of the day.

--- Written by David Song, Currency Analyst

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

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