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

What’s Expected
Time of release: 07/31/2008 12:30 GMT, 08:30 EST
Primary Pair Impact : EURUSD
Expected: 2.3%
Previous: 0.6%

How To Trade This Event Risk

Growth in the U.S. is expected to have risen 2.3% in the second quarter after consecutive quarters of 0.6%. The past two quarters have seen the economy pushed to the brink of a recession as the housing slump and credit crisis has crippled the financial industry and saw one of the largest investment banks close its doors. The Fed has attempted to soften the landing of the economy by cutting the benchmark rate 325 points since last August bringing the benchmark rate to 2.00%. Despite their efforts, concerns remain regarding the credit crisis as Merrill Lynch had to write down another $6 billion in CDO investment with similar moves expected from Lehman Brothers and Wachovia. Growth in the quarter is expected to improve as the government’s fiscal stimulus plan infused nearly 1% of GDP, which has led to personal spending increasing to 0.8%. A 0.8% improvement in durable goods in June and Housing starts improving to 1.066 million from 977,000 could push those components higher. Indeed, the have been the two area that have seen considerable declines over the past two quarters. The upcoming GDP release will for the first time in a year not have a pending rate decision latter in the day, which will leave it as the main event risk for traders to focus on. An expected increase in personal consumption crossing at the same time would add to the bullish sentiment.

The recent bullish dollar momentum has many believing the greenback has put in a bottom and a significant improvement in growth would reinforce those sentiments. Improved growth will give the FOMC the room to hike rates in the near term. Therefore, we will look for 2.5% improvement in growth in conjunction with an increase in personal consumption as a dollar-bullish outcome for this event risk. With a confirmed, bullish slant to the data we will look for a five-minute red candle to confirm entry on two lots of GBPUSD. Our initial stop will be set at the nearby swing high (or reasonable distance) and this risk will determine our first target. Our second target will be based on discretion(with a mind to support and to preserve profit we will move the stop on the second lot to break even when the first half of the trade reaches its target.

On the other hand, a less than expected improvement in the economy given the fiscal stimulus plan will dim the outlook for the next few quarters. We will follow the same strategy for a short as the long above, just in reverse.

Antonio Sousa is a Currency Analyst for FXCM.