EUR/USD: Trading the Preliminary German GDP Report

Economic activity in Germany is expected to expand at a faster pace in the third quarter as economists forecast the growth rate to increase 0.8% after rising 0.3% during the three-months through June, and long-term expectations for higher interest rate in Europe could drive the exchange rate higher as the nation emerges from the worst recession since the post-war period.

Trading the News: German Gross Domestic Product 

What’s Expected

Time of release:        11/13/2009 7:00 GMT, 02:00 EST

Primary Pair Impact :    EURUSD

Expected:         0.8%

Previous:         0.3%

Effect the German Gross Domestic Product report had over EURUSD for the past 2 quarters

2Q 2009 German Gross Domestic Product

The preliminary GDP reading for Germany showed the economy unexpectedly emerged from the recession as the growth rate expanded 0.3% from the first-three months of the year, while the annualized rate of growth slipped 7.1% from the previous year amid expectations for a 7.6% decline. However, as the Bundesbank forecasts the unemployment rate to reach 10.5% in the following year, the slump in the labor market is likely to weigh on economic activity going forward as policy makers see a risk for a protracted recovery. As a result, the European Central Bank is likely to hold borrowing costs at the record-low and maintain its EUR 60B in covered-bond purchases to stem the downside risks for growth and inflation, and is widely expected to maintain a dovish outlook as the central bank sees price growth slipping below the 2% target over the near-term.

1Q 2009 German Gross Domestic Product

Economic activity in Germany contracted at a record pace during the first three-months of the year, with the growth rate tumbling 3.8% from the fourth quarter of 2008, while the annualized rate plunged 6.7% from the previous year amid expectations for a 6.5% drop. The bigger-than-expected decline reinforces a dour outlook for future growth as policy makers anticipate GDP to weaken at an annual pace of 6% this year, and the government may take further steps to shore up Europe’s largest economy as the outlook for global growth remains bleak. Nevertheless, as Chancellor Angela Merkel pledges EUR 82B in public spending to jump-start the ailing economy, with the European Central Bank lowering borrowing costs to a record-low of 1.00% and commiting EUR 60B in covered-bond purchases, the extraordinary efforts taken on by the government should help to stem the downside risks for growth and inflation.

What To Look For Before The Release

Traders with access to market depth information via the FXCM Active Trader Platform may 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 Euro 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 Euro 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.

How To Trade This Event Risk 

Economic activity in Germany is expected to expand at a faster pace in the third quarter as economists forecast the growth rate to increase 0.8% after rising 0.3% during the three-months through June, and long-term expectations for higher interest rate in Europe could drive the exchange rate higher as the nation emerges from the worst recession since the post-war period. Business confidence in the region jumped to a 13-month high in October, with industrial outputs increasing 2.7% after rising 1.8% in August, and the data reinforces an improved outlook for future growth as trade conditions improve. A report by the Federal Statistics Office showed the trade surplus widened to 10.6B from 8.1B in August as exports jumped 3.8%, while the Federal Labor Agency said unemployment slipped 26K in October after falling 15K in the previous month, leading the jobless rate to fall back to 8.1% from 8.2% in previous month, and conditions are likely to improve going into the following year as the government forecasts economic activity to expand at an annual rate of1.2% in 2010 after contracting 0.5% this year. At the same time, retail spending unexpectedly declined 0.5% in September after tumbling 1.8% in the previous month, while the GfK consumer confidence survey slipped to 4.0 from a revised reading of 4.2 in October amid expectations for a rise to 4.5, and the ongoing weakness in the domestic economy may weigh on the outlook for growth as policy makers see a risk for a protracted recovery. Bundesbank President Axel Weber said that “the general economic trend is pointing upward” and expects the growth rate to expand 0.75% in the third quarter, but went onto say that the economy “continues to rely on support from fiscal and monetary policies” and argued that the stimulus “shouldn’t be withdrawn too quickly” as the recovery remains weak. In addition, the central bank head remained “concerned that unemployment may rise in the course of next year,” which would hamper the outlook for private spending, and Mr. Weber continued to see a risk for GDP to remain below last year’s level until 2013 as growth prospects remain subdued. Moreover, the International Monetary Fund anticipates the recovery to be “slow and fragile” as the group forecasts GDP to grow at an annual rate of 0.3% in 2010, and the European Central Bank may keep the benchmark interest rate at the record-low throughout the first-half of the following year in order to encourage a sustainable recovery throughout the euro-region. Nevertheless, as risk trends continue to drive price action in the foreign exchange market, a rise in risk appetite could support the euro higher as market participants move into higher risk/reward investments.

Trading the given event risk favors a bullish outlook for the single-currency as market participants anticipate economic activity in Germany to expand for the second consecutive quarter, and price action following the release could set the stage for a long euro trade as policy makers hold an improved outlook for future growth. Therefore, if the growth rate expands 0.8% or greater from the second quarter, we will look for a green, five-minute candle subsequent to the release to confirm a buy entry on two-lots of EUR/USD. If these conditions are met, we will place our initial stop at the nearby swing low or a reasonable distance taking volatility into account, and this risk will generate our first target. Our 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 target in an effort to preserve our profits. 

In contrast, the slump in household spending paired with tightened credit conditions are likely to weigh on the economy, and a dismal GDP reading is likely to stoke increased selling pressures on the single-currency as investors weigh the prospects for a sustainable recovery in the region. As a result, if GDP expands 0.4% or less, we will favor a bearish outlook for the EUR/USD, and will follow the same strategy for a short euro-dollar trade as the long position mentioned above, just in reverse.