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

Trading the News: U. of Michigan Confidence Survey

What's Expected:

Time of release: 07/15/201113:55GMT, 9:55 EST

Primary Pair Impact:EURUSD

Expected: 72.0

Previous: 71.5

DailyFX Forecast: 70.0K to 73.5K

Why Is This Event Important:

A rebound in U.S. household sentiment should reinforce an improved outlook for the world's largest economy, and the uptick in the U. of Michigan confidence survey could spur a bullish reaction in the dollar as it lifts the prospects for future growth. In turn, the Federal Reserve may raise its fundamental assessment for the region, and the central bank may show an increased willingness to further withdraw monetary support a rise in consumer sentiment could dampen demands for the reserve currency should market participants increase their appetite for yields, and the greenback may struggle to hold its ground as market participants look for more profitable investments.

Recent Economic Developments

The Upside

The Downside

The rebound in retail sales paired with the ongoing expansion in consumer credit certainly raises the prospects of seeing a rise in household confidence, and the Fed may look to wind down its balance sheet further in the months ahead as the outlook for future growth improves. However, as Americans cope with the weakness in the labor market paired with the slower down in wage growth, confidence may deteriorate throughout the second-half of the year, and the Fed may leave the door open to expand monetary policy further in an effort to shore up the economy. In turn, the Fed may see scope to carry its zero interest rate policy well into 2012, and Chairman Bernanke may preserve a balanced tone throughout the remainder of the year as the economic outlook remains clouded with uncertainties.

Potential Price Targets For The Release

How To Trade This Event Risk

Expectations for a rebound in household confidence certainly encourages a bullish outlook for the greenback, and the market reaction to the data could set the stage for a long U.S. dollar trade a growth prospects improve. Therefore, if the survey climbs to 72.0 or higher in June, 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 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 preserve our winnings.

In contrast, the slowing recover paired with the ongoing weakness in the labor market could dampen household confidence, and a dismal sentiment report could instill as bearish outlook for the greenback as growth prospects deteriorate. As a result, if the U. of Michigan index falls back to 70.0 or lower from the previous month, we will carry out the same setup for a long euro-dollar trade as the short position mentioned above, just in the opposite direction.

Impact that the U. of Michigan Confidence survey has had on USD during the last month

June 2011 U. of Michigan Confidence Survey

Consumer confidence in the U.S. weakened more-than-expected in May, with the U. of Michigan survey falling back to 71.8 from 74.3 in the previous month, and the drop in household sentiment certainly reinforces a weakened outlook for the world's largest economy as private sector consumption remains one of the leading drivers of growth. As Americans face the protracted recovery in the labor market paired with the rise in energy costs, household confidence may deteriorate further in the second-half of 2011, and the central bank is widely to retain its zero interest rate policy throughout the remainder of the year in an effort to stem the downside risks for growth. However, as the FOMC plans to unwind the additional $600B in quantitative easing, the committee may continue to wind down its balance sheet over the coming months, and the shift away in risk-taking behavior is likely to gather pace as central bank soaks up liquidity. Indeed, the drop in sentiment sparked a bearish reaction in the greenback, which pushed the EUR/USD back above 1.4300, and the pair certainly held up during the North American trade as the exchange rate settled at 1.4302.

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