EUR/USD: Trading the Change in Orders for U.S. Durable Goods

Trading the News: U.S. Durable Goods Orders

Why Is This Event Important:

Fading demands for U.S. durable goods are likely to reinforce a weakened outlook for future growth as private consumption accounts for more than two-thirds of the economy, and the data could weigh on the dollar as investors weigh the prospects for a sustainable recovery. However, as market sentiment continues to dictate price action in the currency market, a rise in risk aversion could spur a bullish reaction in the greenback as it benefits from safe-haven flows.

What’s Expected:

Time of release:09/24/2010 12:30 GMT, 8:30 EST

Primary Pair Impact :EURUSD

Expected: -1.0%

Previous: 0.3%

Will This Be Market Moving (Scenarios):

Demands for U.S. durable goods are forecasted to contract 1.0% in August following the 0.3% rise in the previous month, while orders excluding transportation equipments are projected to increase 1.0% after unexpected tumbling 3.8% in July. The mixed batch of data could spur choppy price action in the U.S. dollar as the economic outlook remains clouded with uncertainties, and the ongoing weakness in the private sector could lead the Federal Reserve to expand monetary policy further over the coming months in order to stem the downside risks for growth and inflation.

The Upside

Retail spending in the U.S. expanded for the second consecutive month in August, with business production increasing for the last six-months, and firms may increase their rate of investments throughout the remainder of the year as policy makers anticipate the recovery to gather pace 2011. An unexpected rise in the headline reading is likely to encourage an improved outlook, which could lead the U.S. dollar to recoup the losses from earlier this year.

The Downside

However, the uncertainties surrounding the economic outlook paired with cautious tone held by the central bank could discourage private consumption, and a downturn in business investments is likely to weigh on the recovery, which could stoke increased selling pressures on the U.S. dollar. As a result, a dismal durable goods orders report could lead the EUR/USD to pare Thursday’s decline and lead the exchange rate to retrace the sharp decline from April.

How To Trade This Event Risk

Trading the given event risk clearly favors a bearish outlook for the greenback, but an enhanced report could set the stage for a long dollar trade as growth prospects improve. As a result, if demands for U.S. durable goods contract less that 0.5% of unexpectedly increases in August, we will need to see a red, five-minute candle subsequent to the release 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, 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 hits its mark in order to preserve our profits.

On the other hand, the ongoing slack within the real economy paired with the uncertainties surrounding the outlook for future growth could stoke a drop in private consumption, and a sharp decline in business investments could drag on the exchange rate as the prospects for a sustainable recovery deteriorate. Therefore, if demands fall 1.0% or greater from the previous month, we will look to sell the greenback, and will utilize the same setup for a long euro-dollar trade as the short position laid out above, just in reverse.

Potential Price Targets For The Release

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

 

Period

Data Released

Estimate

Actual

Pips Change

(1 Hour post event )

Pips Change

(End of Day post event)

Jul 2010

08/25/2010 12:30 GMT

3.0%

0.3%

+20

+37

 

July 2010 U.S. Durable Goods Orders

 

Demands for U.S. durable goods increased 0.3% in July amid forecasts for a 3.0% expansion, while orders excluding transportation unexpectedly slipped 3.8% after rising a revised 0.2% in the previous month. The breakdown of the report showed orders for non-defense capital goods excluding aircrafts, which acts as a gauge for business investments, slipped 8.0% after increasing 3.6% in the previous month, and conditions may deteriorate further in the second-half of the year as the private sector activity remains weak. The data reinforces a weakened outlook for the world’s largest economy and the slower pace of consumption is likely to weigh on the recovery as private sector spending remains one of the leading drivers of growth. As a result, the Federal Reserve is widely expected to maintain the expansion in monetary policy throughout the remainder of the year and may see scope to support the real economy going into 2011 as it aims to encourage a sustainable recovery.

 

 

What To Look For Before The Release

 

Traders with access to market depth information via the FXCM Active Trader Platformmay 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 EUR 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 EUR 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.

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