Trading the News:U. of Michigan Confidence Survey

What’s Expected:

Time of release:11/11/201114:55GMT,9:55 EST

Primary Pair Impact:EURUSD

Expected:61.5

Previous:60.9

DailyFX Forecast:59.0 to 63.0

Why Is This Event Important:

The U. of Michigan Confidence survey is expected to increase to 61.5 from 60.9 in September, and the rise in household sentiment could spark a bullish reaction in the U.S. dollar as the data reinforces an improved outlook for future growth. As the economic recovery gradually gathers pace, we may see the FOMC talk down speculation for another round of quantitative easing, and the central bank may show an increased willingness to carry a wait-and-see approach into the following year as Fed officials expect economic activity to pick up over the coming months. However, the Fed may keep to door to expand monetary policy further as the fundamentals for the world’s largest economy remains clouded with high uncertainty, and Chairman Ben Bernanke may look to broaden the central bank’s nonstandard measures as the central bank pledges to preserve the zero interest rate policy for a prolonged period.

Recent Economic Developments

The Upside

Release	Expected	Actual
Consumer Credit (SEP)	$5.150B	$7.386B
Personal Consumption (3Q A)	1.9%	2.4%
Advance Retail Sales (SEP)	0.7%	1.1%

The Downside

Release	Expected	Actual
Change in Non-Farm Payrolls (OCT)	95K	80K
Personal Income (SEP)	0.3%	0.1%
Consumer Price Index (YoY) (SEP)	3.9%	3.9%

The expansion in consumer credit paired with the rise in private sector consumption certainly bodes well for consumer confidence, and a positive sentiment report may lead the EUR/USD to extend the decline from 1.4246 as the fundamental outlook for the U.S. improves. However, the protracted recovery in the labor market paired with heightening price pressures may bear down on household sentiment, and Americans may turn increasingly pessimistic towards the economy as the central bank maintains a cautious tone for the region. In turn, we may see the rebound from 1.3483 may gather pace over the next 24-hours of trading, and the euro-dollar may make another run at the 61.8% Fibonacci retracement from the 2009 high to the 2010 low around 1.3880-1.3900 to test for resistance.

Potential Price Targets For The Release

How To Trade This Event Risk

Expectations for a rise in household sentiment encourages a bullish outlook for the greenback, and an above-forecast print could pave the way for a long U.S. dollar trade as growth prospects improve. Therefore, if we see the U. of Michigan survey advance to 61.5 or higher in October, we will need to see a red, five-minute candle following the release to generate a sell entry on two-lots of EUR/USD. Once these conditions are met, we will set the initial stop at the nearby swing low or a reasonable distance from the entry, and this risk will establish 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 reaches its mark in an effort to lock-in our profits.

In contrast, the ongoing weakness in the real economy paired with fears of a double-dip recession may weigh on household confidence, and a dismal sentiment report is likely to weigh on the exchange rate as the fundamental outlook turns increasingly dim. As a result, if the gauge weakens from the previous month, we will implement the same strategy for a long euro-dollar trade as the long position mentioned above, just in reserve.

Impact that the U. of Michigan Confidence survey 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)
OCT 2011	10/14/2011 13:55 GMT	60.2	57.5	+6	+20

October 2011 U. of Michigan Confidence Survey

Household sentiment unexpectedly weakened in October, with the U. of Michigan survey falling back to 57.5 from 59.4 in the previous month, and the development casts a weakened outlook for the world’s largest economy as private sector consumption remains one of the leading drivers of growth. A deeper look at the report showed inflation expectations for the next 12-months weakened to 3.2% from 3.3% in September, while the gauge measuring the economic outlook fell back to 47.0 from 49.4 during the same period. As the slowing recovery bears down on consumer confidence, the Federal Reserve may take additional steps to shore up the ailing economy, and we may see the FOMC carry its easing cycle into the following year in order to stem the downside risks for growth and inflation. The dismal confidence reports sparked a bearish reaction in the greenback, with the EUR/USD pushing above 1.3890, and the reserve currency continued to lose ground throughout the North American session as the exchange rate close at 1.3882.

--- Written by David Song, Currency Analyst

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