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

Economic activity in the U.S. is expected to increase an annualized 2.2% in the first-quarter amid an initial forecasts for a 1.8% expansion, and the upward revision in GDP could spur a bullish reaction in the U.S. dollar as the outlook for future growth improves.

Trading the News: U.S. Preliminary GDP Report

What's Expected:

Time of release: 05/26/2011 12:30 GMT, 8:30 EST

Primary Pair Impact: EURUSD

Expected: 2.2%

Previous: 1.8%

DailyFX Forecast: 2.0% to 2.5%

Why Is This Event Important:

Economic activity in the U.S. is expected to increase an annualized 2.2% in the first-quarter amid an initial forecasts for a 1.8% expansion, and the upward revision in GDP could spur a bullish reaction in the U.S. dollar as the outlook for future growth improves. As the Federal Reserve plans to conclude QE2 in June, the central bank may show an increased willingness to start normalizing monetary policy later this year, and Chairman Ben Bernanke may soften his dovish tone for monetary policy as the committee maintains its dual mandate to ensure price stability while fostering full-employment. However, the Fed may preserve its zero interest rate policy throughout the second-half of the year in an effort to lay the foundations for a sustainable recovery, and dovish rhetoric could threaten the recent appreciation in the greenback as investors scale back speculation for higher borrowing costs in the U.S.

Recent Economic Developments

The Upside

Release	Expected	Actual
Consumer Credit (DEC)	$2.400B	$6.009B
Change in Non-Farm Payrolls (APR)	185K	244K
Personal Incomes (MAR)	0.4%	0.5%

The Downside

Release	Expected	Actual
Industrial Production (APR)	0.4%	0.0%
Trade Balance (MAR)	-$47.0B	-$48.2B
ISM Non-Manufacturing (APR)	57.5	52.8

The ongoing improvement in the labor market paired with the faster pace of wage growth should boost economic activity in the U.S., and recovery is likely to gather pace throughout 2011 as policy makers continue to prop up the real economy. However, the slowdown in global trade paired with the drop in production could lead to a disappointing GDP report, and the Fed may retain a cautious outlook for the region given the substantial margin of slack within the private sector. In turn, Fed Chairman Bernanke may continue to talk down speculation for a rate hike later this year, and the central bank head may keep the benchmark interest rate close to zero in 2011 in an effort to stem the downside risks for the world's largest economy.

Potential Price Targets For The Release

How To Trade This Event Risk

Expectations for an upward revision in 1Q GDP reinforces a bullish outlook for the USD, and the market reaction to the updated figures could pave the way for a long U.S. dollar trade as the economic outlook improves. Therefore, if the growth rate expands 2.2% or greater during the first-three months of the year, we will need a red, five-minute candle following the report to establish a sell entry on two-lots of EUR/USD. Once these conditions are met, we will place the initial stop at the nearby swing high or a reasonable distance after taking market volatility into account, and this risk will generate our first objective. The second target 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 protect our profits.

In contrast, the slowdown in production paired with the weakening terms of trade could bear down on the recovery, and the Fed may look to retain the expansion in monetary policy throughout the second-half of the year in order to stimulate economic activity. As a result, if the GDP expands 1.8% or less, we will implement the same strategy for a long euro-dollar trade as the short position revealed above, just in reverse.

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

Period	Data Released	Estimate	Actual	Pips Change (1 Hour post event )	Pips Change (End of Day post event)
4Q P 2010	2/25/2011 13:30 GMT	3.3%	2.8%	-21	-16

4Q U.S. Preliminary GDP

The preliminary 4Q GDP report showed economic activity increased an annualized 2.8% versus an initial forecast for a 3.3% expansion in the growth rate, while personal consumption climbed 4.1% amid forecasts for a 4.2% rise. The breakdown of the report showed a 22.1% contraction in private investments, followed by a 1.5% decline in government spending, while exports advanced 9.6% after increasing 6.8% in the third quarter. As the recovery in the world's largest economy slows, the Federal Reserve is widely expected to maintain the expansion in monetary policy throughout the first-half of the year, and the central bank may see scope to retain a zero interest rate policy in 2011 as it preserves a dovish outlook for inflation. Indeed, the initial reaction to the downward revision weighed on the greenback, with the EUR/USD advancing to 1.3785, but the reserve currency regains its footing on the back of risk aversion, with the exchange rate settling at 1.3750.

Questions? Comments? Join us in the DailyFX Forum

Join Junior Currency Analyst Christopher Vecchio 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