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: 06/24/2011 12:30 GMT, 8:30 EST

Primary Pair Impact: EURUSD

Expected: 1.5%

Previous: -3.6%

DailyFX Forecast: 1.0% to 2.5%

Why Is This Event Important:

Orders for U.S. durable goods are projected to increase 1.5% in May, and the rebound in private sector consumption could spark a bullish reaction in the greenback as the outlook for future growth improves. As the Federal Reserve continues to support the economy, private sector activity is expected to gather pace in the second-half of 2011, and the central bank may see scope to start normalizing monetary policy later this year as growth and inflation pick up. However, as risk trends continue to dictate price action in the currency market, positive developments coming out of the world’s largest economy could prop up trader sentiment, and a rise in risk appetite could bear down on the USD as market participants move into higher-yielding currencies.

Recent Economic Developments

The Upside

The Downside

The rise in wage growth paired with the expansion in consumer credit is likely to stimulate private sector spending, and a marked rebound in U.S. durable goods could encourage the Fed to adopt an improved outlook for future growth. However, the ongoing weakness in the labor market paired with the drop in household sentiment could bear down on domestic demands, and Americans may scale back on consumption as they face heightening price pressures. In turn, a dismal report may lead the Fed to endorse its zero interest rate policy throughout the remainder of the year, and the central bank may leave the door open to expand its asset purchases in an effort to promote a sustainable recovery.

Potential Price Targets For The Release

How To Trade This Event Risk

Expectations for a rebound in U.S. durable goods certainly reinforces a bullish outlook for the greenback, and price action following the report could set the stage for a long dollar trade as growth prospects improve. Therefore, if demands increase 1.5% or more in May, we will need a red, five-minute candle subsequent to the data to establish a sell entry on two-lots of EUR/USD. Once these conditions are fulfilled, we will place the initial stop at the nearby swing high or a reasonable distance after taking market volatility into account, 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 order to preserve our profits.

In contrast, private sector consumption may deteriorate further as households and businesses cope with rising prices, and a drop in domestic demands could spur a bearish reaction in the USD as the slowing recovery dampens the outlook for future growth. As a result, if orders increase less than 0.6% or unexpectedly contract from the previous month, we will carry out the same setup for a long euro-dollar trade as the short position laid out above, just in reverse.

Impact that the U.S. Durable Goods Orders report has had on USD during the last month

April 2011 U.S. Durable Goods Orders

Demands for U.S. durable goods weakened the most in sixth-months as orders dropped 3.6% in April, and the data certainly curbs the outlook for the world’s largest economy as private sector consumption remains one of the leading drivers of growth. The breakdown of the report showed orders for non-defense capital goods excluding aircrafts, which acts as a gauge for business investments, slipped 2.6% after expanding a revised 5.4% in March, while demands for transport equipment weakened 9.5% after climbing 10.3% in the month prior. As the recovery in the world’s largest economy cools, we are likely to see the Federal Reserve endorse its zero interest rate policy throughout the remainder of the year, but there is likely to be a shift in risk-taking behavior as the central bank plans to unwind the additional $600B in quantitative easing. The EUR/USD rallied to 1.4093 immediately following the release, but the market reaction was certainly short-lived as the downturn in private consumption weighed on risk sentiment.

Questions? Comments? Join us in the DailyFX Forum

Join Junior Currency Analyst Christopher Vecchio in the DailyFX Trading Room to cover the event LIVE!

View the Expo Presentation on ‘Trading the News’ For Additional Resources

To discuss this report contact David Song, Currency Analyst: dsong@dailyfx.com