EUR/USD to Face Larger Rebound on Dismal 4Q U.S. GDP

- U.S. Economy to Expand for Third Straight Quarter in 2014.

- Personal Consumption to Grow 4.0%- Would Mark Biggest Advance Since 4Q 2010.

Trading the News: U.S. Gross Domestic Product (GDP)

The advance U.S. 4Q Gross Domestic Product (GDP) report may generate a larger rebound in EUR/USD should the fresh batch of data highlight a slowing recovery in the world’s largest economy.

What’s Expected:

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Why Is This Event Important:

Even though the Federal Open Market Committee (FOMC) is widely expected to raise the benchmark interest rate in mid-2015, a dismal GDP print may push the central bank to further delay its normalization cycle especially as it struggles to achieve the 2% target for inflation.

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Expectations: Bearish Argument/Scenario

Subdued wages paired with the recent contraction in private consumption may generate a marked slowdown in economic activity, and a weaker-than-projected growth rate may undermine the bullish sentiment surrounding the dollar as it drags on interest rate expectations.

Risk: Bullish Argument/Scenario

Nevertheless, improved confidence along with the ongoing recovery in the labor market may prompt a strong GDP figure, and a positive development may promote a further decline in EUR/USD amid the deviation in the policy outlook.

How To Trade This Event Risk(Video)

Bearish USD Trade: 4Q GDP Fails to Meet Market Expectations

• Need to see green, five-minute candle following the GDP report to consider a long trade on EURUSD
• If market reaction favors a short dollar trade, buy EURUSD with two separate position
• Set stop at the near-by swing low/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

Bullish USD Trade: Growth Rate Expands 3.0% or Greater

• Need red, five-minute candle to favor a short EURUSD trade
• Implement same setup as the bearish dollar trade, just in reverse

Potential Price Targets For The Release

EUR/USD Daily

Chart - Created Using FXCM Marketscope 2.0

• Keeping a close eye on the RSI as it continues to flirt with the 30 level; rebound from oversold territory to favor a larger rebound for EUR/USD.
• Interim Resistance: 1.1440 (23.6% retracement) to 1.1470 (78.6% expansion)
• Interim Support: 1.1096 (January low) to 1.1100 pivot

Read More:

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Scalping EURAUD Breakout- Longs Favored Above 1.44

Impact that the U.S. GDP report has had on EUR/USD during the last release

3Q 2014 U.S. Gross Domestic Product (GDP)

The U.S. economy advanced more-than-expected in the third-quarter, with the growth rate expanding another annualized 3.5% following the 4.6% expansion during the three-months through June. At the same time, Personal Consumption climbed 1.8% during the same period amid forecasts for a 1.9% print, while the core Personal Consumption Expenditure (PCE) narrowed to 1.4% from 2.0% in the second-quarter. Despite the better-than-expected GDP print, the Fed appears to be in no rush to normalize monetary policy as it struggles to achieve the 2% target for inflation. The initial reaction in EUR/USD was short-lived as the pair snapped back from the 1.2550 region, with the pair ending the day at 1.2602.

--- Written by David Song, Currency Analyst and Shuyang Ren

To contact David, e-mail dsong@dailyfx.com. Follow me on Twitter at @DavidJSong.

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