EUR/USD: Trading the U. of Michigan Confidence Survey

Household sentiment in the world’s largest economic is expected to reach a two-year high in April as economists forecast the University of Michigan confidence survey to increase to 75.0 after holding steady at 73.6 for two consecutive months, and the data is likely to encourage an enhanced outlook for the U.S. as consumer spending remains one of the leading drivers of growth.
Trading the News: U. of Michigan Confidence Survey

What’s Expected
Time of release:        04/16/2010 13:55 GMT, 09:55 EST
Primary Pair Impact :    EURUSD
Expected:         75.0
Previous:         73.6

Impact the U. of Michigan survey has had on EURUSD through the last 2 months

March 2010 U. of Michigan Confidence Survey

The U. of Michigan confidence survey unexpectedly declined for a second month in March as households held a cautious outlook for the economy given the ongoing weakness in the labor market. The sentiment index retreated to 72.5 from a final reading of 73.6 in February amid expectations for a rise to 74.0. The breakdown of the report illustrated that the economic outlook narrowed to 67.2 from 68.4 in February, while the gauge for the current situation decreased to 80.8 from 81.8 in the previous month. The data reinforces a weakened outlook for future growth as private spending accounts for more than two-thirds of the economy, and the Fed is widely anticipate to maintain a loose policy going into the second-half of the year as the central bank aims to encourage a sustainable recovery.

February 2010 U. of Michigan Confidence Survey

Consumer confidence in the U.S. unexpectedly weakened in February from a two year. The U. of Michigan survey slid to 73.7 from 74.4 in January, and households may turn increasingly pessimistic towards the economy as they continue to face a weakening labor market paired with tight credit conditions. Taking a closer look at the breakdown of the report, the economic outlook weakened to 66.9 from 70.1 in January, while economic conditions actually pushed higher for the month, climbing to 84.1 from 81.1 the previous month, signaling that Americans believe it is a good time to purchase big-ticket items such as homes. Looking ahead, the Fed is widely anticipate to hold the benchmark interest rate at 0.25% over the coming months as the central bank aims to cement economic recovery.

What To Look For Before The Release

Traders with access to market depth information via the FXCM Active Trader Platform may use it to gauge the potency of the economic data release as well as to shed some light on the market’s directional bias. Increasing volume ahead of the announcement will telegraph likely follow-through behind whatever move is to materialize, while an imbalance in available liquidity on the Bid versus the Offer side of the market will tell us the direction major institutions are likely favoring ahead of the announcement:

Bullish Scenario: If we see substantially deeper available liquidity on the Bid side of the market, this tells us that major price providers in the market are looking to buy the Euro against the US Dollar. Considering that close to 60% of all FX market volume is cleared through just six top banks, we see it prudent to be on the same side of the trade as major institutions and will favor a bullish bias on EURUSD ahead of the data release.

Bearish Scenario: If we see substantially deeper available liquidity on the Offer side of the market, this tells us that major price providers in the market are looking to sell the Euro against the US Dollar. Considering that close to 60% of all FX market volume is cleared through just six top banks, we see it prudent to be on the same side of the trade as major institutions and will favor a bearish bias on EURUSD ahead of the data release.

How To Trade This Event Risk

Household sentiment in the world’s largest economic is expected to reach a two-year high in April as economists forecast the University of Michigan confidence survey to increase to 75.0 after holding steady at 73.6 for two consecutive months, and the data is likely to encourage an enhanced outlook for the U.S. as consumer spending remains one of the leading drivers of growth. A report by the Labor Department showed non-farm payrolls increased 162K in March to post the biggest advance since 2007, led by a 123K rise in private-sector employment, and conditions are likely to improve over the coming months as the expansion in monetary and fiscal policy continues to feed through the real economy. In addition, retail spending jumped 1.6% during the same period after rising a revised 0.5% in February to top forecasts for a 1.2% rise, while chain store sales increased at an annualized pace of 9.0% in March to mark the fastest pace of growth since March 1999. However, the final 4Q GDP reading showed economic activity increased at an annual rate of 5.6% amid expectations for a 5.9% expansion in the growth rate, which was stoked by a less-than-expected rise in business investments, and firms may keep a lid on employment over the coming months as policy makers continue to see a risk for a protected recovery.

Nevertheless, the Fed’s Beige Book release earlier this week said that economic conditions in 11 of the 12 districts improved, with household spending increasing, while the central bank went onto say that the labor market remained “generally” weak as businesses remain reluctant to add payrolls. At the same time, Fed Chairman Bernanke said that he expects a “moderate” recovery this year during his testimony in front of the Joint Economic Committee of Congress, and argued that there remains “significant restraints on the pace of the recovery” as households face the ongoing weakness in the labor market paired with tightening credit standards. As a result, the central bank head said that “a significant time will be required to restore the 8-1/2 million jobs that were lost during the past two years,” and maintained a dovish outlook for future policy as inflation remains “subdued.” As the government aims to encourage a sustainable recovery, the FOMC is likely to hold the benchmark interest rate at the record-low going into the second-half of the year, but the central bank may look to normalize policy further towards the end of 2010 as the rebound in economic activity gathers pace.

Trading the given event risk favors a bullish outlook for the greenback as economists forecast consumer sentiment to increase in April, and price action following the release could set the stage for a long dollar trade as the outlook for future growth improves. Therefore, if the U. of Michigan survey increases to 75.0 or higher, we will need to see a red, five-minute candle following the release to establish 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 after taking market volatility into account, and this risk will establish 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 order to preserve our profits.

In contrast, the ongoing weakness in the economy paired with subdued wage growth could stoke a drop in household confidence, and fears  of a protracted recovery could drag on the exchange rate as investors weigh the outlook for future growth. As a result, if the survey falls short of expectations or unexpectedly holds steady at 73.6 for the third month, we will favor a bearish outlook for the greenback, and will utilize the same strategy for a long euro-dollar trade as the short position laid out above, just in reverse.

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

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