EUR/USD: Trading the Advance 1Q U.S. GDP Report

Trading the News: U.S. GDP

What's Expected:

Time of release: 04/28/2011 12:30 GMT, 8:30 EST

Primary Pair Impact: EURUSD

Expected: 2.0%

Previous: 3.1%

DailyFX Forecast: 1.8% to 2.0%

Why Is This Event Important:

The advanced 1Q GDP report is expected to show the world's largest economy growing at an annualized pace of 2.0% following the 3.1% expansion during the last three-months of 2010, and the slower pace of economic activity could spur a bearish reaction in the U.S. dollar as the Federal Reserve maintains a cautious outlook for the nation. After maintaining its current policy in April, Fed Chairman Ben Bernanke said growth as ‘relatively weak' in the first-quarter while holding his first-ever policy press conference, and expects to see a ‘moderate recovery' going forward after the central bank lowered its 2011 growth forecast, which showed the economy expanding 3.1% to 3.3% this year. As the central bank head continues to highlight the ongoing weakness within the real economy, the FOMC is widely expected to maintain its current policy throughout the first-half of the year, and the bearish sentiment underlying the greenback may gather pace going forward as the Fed maintains a dovish outlook for monetary policy.

Recent Economic Developments

The Upside

The Downside

The rise in business investment paired with the ongoing improvement in consumer credit conditions are likely to boost economic activity in the first-quarter, and the recovery should gather pace going forward as the Fed continues to support the real economy. However, as households and businesses cope with higher energy costs, the slowdown in private sector consumption paired with easing wage growth could generate a dismal GDP report as personal spending remains one of the leading drivers of economic activity. In turn, the Fed may keep borrowing costs close to zero for most of 2011, and the bearish sentiment underling the reserve currency may intensify going forward as interest rate expectations falter.

Potential Price Targets For The Release

How To Trade This Event Risk

Expectations for a slower pace of economic expansion certainly reinforces a bearish outlook for the greenback, but an enhanced growth report could set the stage for a long U.S. dollar trade as investors weigh the prospects for a sustainable recovery. As a result, if GDP expands at an annualized rate of 2.5% or greater in the first-quarter, we will need to see a red, five-minute candle following 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 target. The second target will be based on trader 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, the slowdown in private sector consumption paired with the ongoing weakness within the housing market could produce a dismal growth report, and the U.S. dollar may face selling pressures following the data as the outlook for future growth weakens. As a result, if the growth rate expands less than 2.0% in the first-quarter, we will carry out the same setup for a long euro-dollar trade as the short position mentioned above, just in reverse.

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

4Q 2010 Advanced U.S. GDP

Economic activity in the U.S. expanded at an annualized pace of 3.2% during the last three-months of 2010, which missed forecasts for a 3.5% rise in the growth rate, while personal consumption increased 4.4% during the same period to mark the fastest pace of growth since the first-quarter of 2006. The breakdown of the report showed gross private investments tumbled 22.5% during the fourth-quarter after expanding 15.0% during the last three-months, with government consumption weakening 0.6%, while exports increased another 8.5% after climbing 6.8% in the third-quarter. As the recovery gathers pace, the Fed may conclude the additional $600B in quantitative easing in June and see scope to gradually normalize monetary policy in the second-half of the year, but the ongoing weakness within the labor market could lead the central bank to support the real economy for most of 2011 as it aims to encourage a sustainable recovery. Indeed, currency traders initially showed a bearish U.S. dollar reaction to the slower pace of growth, but a rise in risk aversion sparked increased demands for the reserve currency, leading the EUR/USD to end the day at 1.3608.

Questions? Comments? Join us in the DailyFX Forum

Join Currency Analyst David Song 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