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

Trading the News: U.S. Durable Goods Orders

What's Expected:

Time of release: 09/28/2011 12:30 GMT, 8:30 EST

Primary Pair Impact:EURUSD

Expected: -0.2%

Previous: 4.0%

DailyFX Forecast: -0.5% to 0.2%

Why Is This Event Important:

Orders for U.S. durable goods are projected to slump 0.2% in August following the 4.0% expansion in the previous month, and the slowdown in private sector consumption may weigh on the exchange rate as it dampens the outlook for future growth. In response, the Fed may carry its easing cycle into the following year and the central bank may keep the door open to conduct another round of quantitative easing in an effort to stimulate the ailing economy.

However, we may see a growing rift within the FOMC as the central bank's nonstandard measures come under increased scrutiny, and the committee may preserve a wait-and-see approach throughout the remainder of the year as policy makers expect economic activity to gather pace in the months ahead. Nevertheless, the market reaction may not be as clear cut as some of our previous trades as trader sentiment continues to dictate price action in the currency market, and a drop in durable goods may weigh on risk-taking behavior, which could spark increased demands for the USD.

Recent Economic Developments

The Upside

The Downside

The rebound in household confidence paired with the marked expansion in consumer credit may spark increased demands for large-ticket items, and a rise in private sector consumption may lead the EUR/USD to give back the advance from earlier this week as the outlook for the world's largest economy improves. However, the ongoing weakness in the labor market paired with the downturn in wage growth may bear down on consumption, and a dismal report could instill a bearish outlook for the greenback as growth prospects deteriorate. In turn, the EUR/USD may continue to recoup the losses from earlier this month, and the exchange rate may work its way back towards the 61.8% Fibonacci retracement from the 2009 high to the 2010 low around 1.3880-1.3900 as the U.S. faces a growing risk of a double-dip recession.

Potential Price Targets For The Release

How To Trade This Event Risk

Fading demands for U.S. durable goods certainly reinforce a bearish outlook for the greenback, but a positive development could pave the way for a long U.S. dollar trade as it raises the outlook for future growth. As a result, if demands unexpectedly increase from the previous month, we will need a red, five-minute candle subsequent to 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 from the entry, 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 breakeven once the first trade reaches its mark in order to preserve our profits.

In contrast, we may see a sharp decline in consumption given the ongoing weakness within the real economy, and speculation for QE3 may resurface as the world's largest economy faces an increased risk of falling back into a recession. Therefore, if demands weaken from the previous month, we will carry out the same strategy for a long euro-dollar trade as the short position mentioned above, just in reverse.

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

July 2011 U.S. Durable Goods Orders

Demands for U.S. durable goods increased 4.0% in July after contracting a revised 1.1% in the month prior, and the rebound in private sector consumption fosters an improved outlook for the world's largest economy as it remains one of the leading drivers of growth. A deeper look at the report showed orders for non-defense capital goods excluding aircrafts, which acts as a proxy for business investments, fell 1.5% after expanding 0.6% in June, while inventories climbed another 0.8% in July following the 0.6% rise in the previous month. As private sector activity improves, the Fed may raise its assessment for the world's largest economy, but it seems as though the central bank will provide additional monetary support in an effort to stem the risk of a double-dip recession. Indeed, the initial reaction was short-lived as the EUR/USD fell back to 1.4428, and the greenback continued to gain ground throughout the North American trade as the exchange rate settled at 1.4411 at the end of the day.

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