News Column

EUR/USD Risks Another Test of Key Support as U. of Michigan Improves

May 16, 2014

David SongGregory Marks

- U. of Michigan Confidence to Improve for Second Consecutive Month.

- Print of 84.5 Would Mark the Highest Reading Since July.



Trading the News: U. of Michigan Confidence



A second straight rise in the U. of Michigan Confidence survey may spur a further decline in the EUR/USD as the ongoing improvement in the world's largest economy puts increased pressure on the Federal Reserve to normalize monetary policy sooner rather than later.



What's Expected:

EUR/USD U. of Michigan Confidence



Why Is This Event Important:



Despite expectations for a rate hike in 2015, a further pickup in household sentiment may undermine the Fed's scope to retain the zero-interest rate policy (ZIRP) well into the following year, and a positive development may help to paint a more bullish outlook for the dollar as it raises the outlook for growth and inflation.



Expectations: Bullish Argument/Scenario

Release

Expected

Actual

Consumer Credit (MAR)

$15.500B

$17.529B

Change in Non-Farm Payrolls (APR)

218K

288K

ADP Employment Change (APR)

210K

220K



The ongoing improvement in the labor market along with the expansion in private sector lending may encourage a further pickup in consumer sentiment, and a better-than-expected print may generate a more bearish outlook for the EUR/USD as it raises the prospects for a stronger recovery.



Risk: Bearish Argument/Scenario

Release

Expected

Actual

Consumer Price Index Core (YoY) (APR)

1.7%

1.8%

Average Hourly Earnings (YoY) (APR)

2.1%

1.9%

Personal Consumption Expenditure Core (YoY) (MAR)

1.2%

1.2%



However, sticky inflation paired with subdued wage growth may drag household confidence, and a dismal U. of Michigan release may spur a more meaningful rebound in the EUR/USD as drags on interest rate expectations.





How To Trade This Event Risk(Video)



Bullish USD Trade: U. of Michigan Survey Advances to 84.5 or Higher

  • Need to see red, five-minute candle following the release to consider a short trade on EURUSD
  • If market reaction favors a long dollar trade, sell EURUSD with two separate position
  • Set stop at the near-by swing high/reasonable distance from entry; look for at least 1:1 risk-to-reward
  • Move stop to entry on remaining position once initial target is hit; set reasonable limit



    Bearish USD Trade: Household Confidence Falters

  • Need green, five-minute candle to favor a long EURUSD trade
  • Implement same setup as the bullish dollar trade, just in the opposite direction



    Potential Price Targets For The Release



    EUR/USD Daily

    EUR/USD Daily Chart
  • Fails to Retain Bullish RSI Momentum- Close Below Support to Favor Bearish Outlook
  • Interim Resistance: 1.3960-70 (61.8% expansion)
  • Interim Support: 1.3650 (78.6 expansion) to 1.3660 (23.6 retracement)



    Read More:

    USD/JPY Needs Close Below 101.50 to Favor Bearish Forecast

    Sea Change in Central Bank Policy Leaves EUR/JPY, GBP/JPY Vulnerable



    Impact that the U. of Michigan Confidence has had on EUR/USD during the last release



    Period

    Data Released

    Estimate

    Actual

    Pips Change

    (1 Hour post event )

    Pips Change

    (End of Day post event)

    APR P

    2014

    04/11/201413:55 GMT

    81.0

    82.6

    +7

    +8



    April 2014 U. of Michigan Confidence Survey



    EUR/USD Chart



    The University of Michigan Confidence survey beat estimates last month coming in at 82.6 vs. 81.0 expected. The figure has failed to break 86 since 2007. Although not a large market mover, any major deviation from expectations could add to pressure on the greenback.



    --- Written by David Song, Currency Analyst and Gregory Marks
















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    Source: DailyFx


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