The advanced GDP reading for the U.S. is expected to show that the economy contracted 0.5% in the third quarter. Economic activity has weakened significantly throughout the second half of the year as the effects of the fiscal stimulus checks abate, and conditions may only get worse as the jobless rate continues to rise.

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

What’s Expected
Time of release: 10/30/2008 12:30 GMT, 08:30 ET
Primary Pair Impact : EUR/USD
Expected: -0.5%
Previous: 2.8%

2Q 2008 U.S. Gross Domestic Product

The advanced GDP reading for the second quarter showed that the U.S. economy grew at an annual pace of 1.9%, which crossed the wires slightly weaker than the initial estimate of 2.3% projected by economists. The data shows that the fiscal stimulus plan has certainly helped to stave off a downturn in the economy, but conditions may only get worse as the effects of the rebate checks wears off. Meanwhile, a separate report showed that jobless claims surged to a five year high during July, indicating that higher input costs are forcing firms to cutback on employment. As employment opportunities wane, private-sector spending may weaken throughout the second half of the year as higher inflation continues to sap purchasing power for consumers.

1Q 2008 U.S. Gross Domestic Product

Growth in the U.S. expanded 0.6% dispelling belief that the country was already in a recession. Although subtracting the build up in inventories the first quarter would have contracted. A 26.7% decline in investment in residential property demonstrates that the housing slump in the U.S. has continued and the economy recovery may dependent ion the stabilizing of the sector. Also, durable goods orders fell 6.1% as a weak dollar has failed to generate enough increased demand from overseas to offset the weakness domestically. However, the news was overshadowed by a pending FOMC rate decision. Therefore, we wouldn’t have traded the release as we were focused on the larger event risk. The central bank would cut rates by 25 bps as they tried to prevent the economy from slipping into a recession.

4Q 2007 U.S. Gross Domestic Product

U.S. GDP fell sharply to 0.6% in the fourth quarter from 3.9% the quarter prior. A monumental drop in gross private investment of 14.6% led by a 25.2 decline in residential, drag the economy to the brink of a recession. The economy also saw a precipitous drop in exports from 19.1% in the third quarter to 6.5%. The housing slump and credit crunch would lead to the FOMC cutting rates by 50 points latter in the day, bringing the benchmark rate to 3.00%. The central bank was dovish following that decision, as they see further weakness in the housing sector and credit conditions remaining difficult. The pending rate decision would leave us on the sidelines with the expected rate cut looming.

How To Trade This Event Risk

The advanced GDP reading for the U.S. is expected to show that the economy contracted 0.5% in the third quarter. Economic activity has weakened significantly throughout the second half of the year as the effects of the fiscal stimulus checks abate, and conditions may only get worse as the jobless rate continues to rise. Non-farm payrolls fell for the ninth consecutive month in September as the economy lost 159K jobs from the previous month, while the employment component of the ISM manufacturing report weakened for the second month as the index plunged to 41.8 from 49.7. The lack of recovery in the housing market paired with narrowing opportunities for employment have certainly pushed consumers to cutback on consumption as retail sales slipped 1.2% in September. In addition, durable goods orders plunged 4.8% from July, while domestic vehicle sales dipped to 9.6M from 10.4M in August. Fading demands from the domestic economy has certainly fuel fears of a recession as private-sector consumption accounts for more than two-thirds of GDP, but arguments have been made that the recent drop in oil prices should help consumers to deal with the slowdown in the economy. After peaking to a high of $147 a barrel in July, crude oil prices have fallen drastically over the past two months to hold below $65 a barrel. Cheaper gas prices paired with the increased efforts by the U.S. Treasury and the Fed could help to stave off further downturns in the economy as the growth outlook remains highly uncertain in the near-term. Meanwhile, the U.S. dollar may face increased selling pressures as market participants expect economic activity in the world’s largest economy to deteriorate further over the coming months, but the greenback may continue to reap the benefit of its safe haven status as concerns of a global recession intensify.

Despite the slowdown in the economy, the U.S. dollar continues to strengthen against its major currency counterparts, and a better than expected GDP reading could spur increased buying pressures for the greenback. Therefore, annualized growth of 0.1% or better would certainly favor a bullish dollar trade (short GBPUSD), and we will look for a red, five-minute candle following the release to confirm entry on two lots of the pound-dollar. 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 negative GDP reading would only dampen the growth forecast for the U.S., which could drag on the greenback as the world’s largest economy heads into a recession. As a result, we will follow the same strategy for a short position as the long trade mentioned above, just in reverse.

Antonio Sousa is a Currency Analyst for FXCM.