http://www.dailyfx.com/forex/fundamental/daily_briefing/daily_pieces/trading_news_reports/2011/01/03/EURUSD_Trading_the_Change_in_German_Unemployment.html
Trading the News: German Unemployment Change
Why Is This Event Important:
As market participants anticipate Germany’s labor market to improve for the 18th month in December, the data could spark a bullish reaction in the euro as the recovery in Europe’s largest economy gathers pace. However, as the sovereign debt crisis continues to bear down on investor sentiment, the release may fail to produce a tradable event, and the single-currency may face increased headwinds in 2011 as the risk for contagion intensifies.
What’s Expected:
Time of release:1/4/2011 8:55 GMT, 3:55 EST
Primary Pair Impact :EURUSD
Expected: -15K
Previous: -9K
Will This Be Market Moving (Scenarios):
Unemployment in Germany is forecasted to weaken another 15K in December after slipping 9K in the previous month, while the jobless rate is projected to hold steady at 7.5% for the fourth consecutive month. As businesses continue to increase production and employment, the recent developments certainly encourage an enhanced outlook for future growth, and the European Central Bank may continue to talk down speculation for additional monetary easing as the prospects for growth and inflation improves.
The Upside
As business confidence in Germany advances to a record-high in December, with manufacturing expanding at the fastest pace since July, the rebound in the labor market may accelerate over the coming months as firms continue to increase their rate of production. In turn, a marked drop in unemployment should lead the EUR/USD to retrace the decline from the first trading day in January, and the exchange rate may make a run at the December high (1.3497) as the economic recovery in Europe picks up steam.
The Downside
However, as the rise in global trade slowly tapers off, with firms facing rising input costs, businesses may keep a lid on production and employment as the economic outlook remains clouded with high uncertainty. A dismal labor report could bear down on the exchange rate and lead the EUR/USD to retrace the advance from the holiday trade as European policy makers expect to see an uneven recovery unfold going forward.
How To Trade This Event Risk
Expectations for a drop in German unemployment certainly reinforces a bullish outlook for the single-currency, and price action following the release could set the stage for a long euro trade as growth prospects improve. Therefore, if unemployment slips 15K or greater in December, we will need to see a green, five-minute candle following the data to establish 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 from the entry, and this risk will generate our first objective. The second target 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.
On the other hand, the slowdown in global trade paired with the fears surrounding the economic outlook may lead businesses to keep a lid on employment, and a dismal labor report could fuel a sharp reversal in the EUR/USD as the prospects for growth and inflation deteriorate. As a result, if unemployment weakens less than 5K or unexpectedly increases from the previous month, we will utilize the same strategy 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 change in German Unemployment 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) |
| Nov 2010 | 11/30/2010 8:55 GMT | -20K | -9K | -36 | -76 |
November 2010 German Unemployment Change
| Unemployment in Germany weakened 9K in November to 3.14M to mark the lowest level since December 1992, while the jobless rate held steady at 7.5% for the third consecutive month as discouraged workers returned to the labor force. As the labor market improves , the rebound in private sector activity is likely to gather pace going forward, and the economic recovery is widely expected to carry into the following year as the European Central Bank maintains the expansion in monetary policy. However, as European officials expect to see an ‘uneven’ recovery across the region, the ongoing turmoil within the financial system could lead the central bank to delay its exit strategy, and the ECB may see scope to conduct additional monetary easing in 2011 as it aims to balance the downside risks for growth and inflation. In turn, the Governing Council is likely to maintain a dovish tone going into the following year, and the committee is widely expected to retain its wait-and-see approach throughout the first-quarter of 2011 as the governments operating under the single-currency struggle to manage their public finances. |  |
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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View the Expo Presentation on ‘Trading the News’ For Additional Resources
To discuss this report contact David Song, Currency Analyst: dsong@fxcm.com
DailyFX provides forex news on the economic reports and political events that influence the currency market.
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