As market participants expect investor confidence in Germany to weaken for the fourth consecutive month in August, the data is likely to drag on the economic outlook, which could spark a selloff in the euro as market participants weigh the prospects for future growth.

Trading the News: German ZEW Survey

Why Is This Event Important:

However, as European policy makers hold an improved outlook for the region and expect the recovery to gather pace throughout the third-quarter, and unexpected rise in the ZEW survey could lead the EUR/USD to retrace the sharp decline from the previous week as growth prospects improve.

What’s Expected:

Time of release:08/17/2010 9:00 GMT, 5:00 EST

Primary Pair Impact :EURUSD

Expected: 20.0

Previous: 21.2

Will This Be Market Moving (Scenarios):

The ZEW investor confidence survey is expected to fall to 20.0 in July from 21.2 in the previous month, while the gauge for the current situation is projected to increase to 24.0 from 16.6 in June, which be the highest reading since June 2008. As the region benefits from the rise in global trade, the rebound in economic activity may gather pace throughout the second-half of 2010, but the instability in the global financial system paired with fears surrounding the economic outlook could stoke a drop in investor sentiment and spark further weakness in the euro.

The Upside

The advanced 2Q GDP report for Germany showed economic activity expanded at the fastest pace since comparable records begin in 1991, and the jump in the growth rate could foster a rise in investor confidence as the Bundesbank sees “a gradual stabilization of private consumption” paired with a “remarkable” improvement in the labor market. As the German central bank talks down the risks for a double-dip recession and expects the marked recovery to carry through the third-quarter, the recent economic developments could stoke an unexpected rise in the ZEW’s gauge for future expectations, which could lead to a rebound in the euro.

The Downside

However, as policy makers expect to see an “uneven” recovery in Europe, with households and businesses continuing to face tightening credit conditions, investors may turn increasingly cautious as the outlook for future growth remains clouded with uncertainties. Accordingly, the European Central Bank may look to support the real economy throughout the second-half of the year, and may keep its exit strategy on hold as the tightening in fiscal policy weighs on the recovery.

How To Trade This Event Risk

Trading the given event risk certainly favors a bearish outlook for the single-currency but nevertheless, an enhanced confidence reading could set the stage for a long euro trade as growth prospects improve. Therefore, if the index holds steady at 21.2 or unexpectedly bounces back from the previous month, we will need to see a green, five-minute candle following the release to generate a buy entry on two-lots of EUR/USD. Once these conditions are fulfilled, we will set the initial stop at the nearby swing low or a reasonable distance, 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 breakeven once the first trade reaches its mark in an effort to lock-in our profits.

In contrast, the uncertainties surrounding the outlook for the region paired with the weakness in the banking system could drag on investor sentiment, and the single-currency could come under pressure following a dismal ZEW survey as market participants weigh the prospects for future growth. As a result, if the index slips to 20.0 or lower, we will favor a bearish outlook for the exchange rate, and will utilize the same setup for a short euro-dollar trade as the long position laid out above, just in reverse.

Potential Price Targets For The Release

Impact that the German ZEW Survey has had on EUR during the last month

Period

Data Released

Estimate

Actual

Pips Change

(1 Hour post event )

Pips Change

(End of Day post event)

Jul 2010

07/13/2010 9:00 GMT

25.3

21.2

+47

+181

Jul 2010 German ZEW Survey

Investor confidence in Germany weakened for the third month in July, with the ZEW survey slipping to a 15-month low of 21.2 from 28.7 in the previous month, while the gauge for the current situation increased to 14.6 from -7.9 in June. As the governments operating under the single-currency tighten fiscal policy and target the budget deficit, the austerity measures are likely to drag on economic activity as the European Central Bank expects to see an “uneven” recovery going forward, and the Governing Council may support the real economy throughout the second-half of the year as policy makers anticipate price growth to remain subdued over the coming months. However, as the Bundesbank raises its growth forecast and sees the German economy expanding at an annualized rate of 1.9% versus an initial forecast for a 1.6% rise in the growth rate, the central bank may see scope to normalize policy later this year as the region continues to benefit from the rebound in global trade.

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 EUR 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 EUR 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.

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