Market Update: Trading the US GDP
The US GDP report, released quarterly, is considered one of the most important indicators of economic activity, and a figure better than expectations later today will be considered bullish for the dollar.
Most of our traders will be looking at the report for its impact on the EUR/USD. Here’s the dynamics of the trade opportunity, just prior to and after its release at 1:30pm GMT:
- The last quarter of 2011 saw GDP increase by 2.5%, and the markets are predicting an even better number for Q4, with an increase of 3.0%.
- A strong reading will boost confidence, and if the reading is stronger than this month’s prediction, the Euro/Usd could fall in value as investors move back into the US economy.
- With a forex binary option, if you believe the Eur/Usd is declining in value you would buy a PUT option.
- Alternatively if you are trading a standard forex trade, you could take a combination long forex position combined with a PUT binary option, as shown in the chart above.
- In this case if you believe the market may reverse you could secure your investment in the event of a failed breakout.
The expectations are for 3.0% annualized growth for the quarter, an uptick from previous quarter results of 2.5% and solid sign of renewed growth. Check the results shortly after the release from our economic calendar and look for surprise developments.
Why is it important?
Released quarterly by the US government, it’s the broadest measure of economic activity and the primary gauge of the economy’s health. It’s considered a high impact report for traders to watch, and actual results better than forecast are positive for the currency.
Quantitative Easing by the Central banks
Central banks are running out of options to help the subdued western economies. Wednesday saw two important news items.
The Bank of England governor, led by dovish Mervyn King, is in favour of enlarging the QE amount. The 75 billion additional QE is due to run out this month and the central bank is thinking about increasing the program to boost UK’s economic growth. This may drag UK long-maturity bond yields lower.
The US Fed now promises to hold loose a monetary policy until 2014. It issued a statement on Wednesday, saying: “Economic conditions — including low rates of resource utilization and a subdued outlook for inflation over the medium run — are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014.” This will extend the zero-rate policy to almost 5 years. So, central banks are boosting QEs to revive economic growth.
But by engaging in more money printing, investors are favouring hard assets such as Gold, which had a positive reaction following Wednesday’s announcements. It may rally to $1750-1800 should more central banks announce QE.
It will be a difficult time to short the equity market because QE often boost investor sentiment. We anticipate a further rally in equities generally.
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