EUR/USD: Trading the Change in German Unemployment

The Euro is likely to face increased volatility over the next 24 hours of trading as economists forecast unemployment in Germany to rise 5K in December, and the downturn in the labor market could weigh on the exchange rate as the Bundesbank anticipates the jobless rate to reach 10.1% in 2011.

Trading the News: German Unemployment Change

What’s Expected
Time of release: 01/05/2010 08:55 GMT, 03:55 EST
Primary Pair Impact : EURUSD
Expected: 5K
Previous: -7K

Impact the German Unemployment Change has had on EURUSD over the last 2 months

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November 2009 German Unemployment Change
Unemployment in Germany pushed lower in November amid government measures that encouraged firms to maintain their labor force, and conditions are likely to improve going forward as the expansion in monetary and fiscal policy continues to feed through the real economy. The number of people out of work unexpectedly tumbled 7K in November, with the jobless rate slip to 8.1% from 8.2% the month prior, and firms may continue increase their willingness to retain their employees as the economy emerges from the recession. Going forward, the government plans to cut taxes by approximately 20 billion Euros in January and by the same amount in 2011 in order to encourage a sustainable recovery in Europe’s largest economy, and the European Central Bank is widely expected to keep borrowing costs at the record-low throughout the first-half of 2010 as policy makers aim to balance the risks for growth and inflation. 01.04_TTN2

October 2009 German Unemployment Change
Job losses in Germany unexpectedly fell in October, with the number of individuals out of work declining 26K after slipping 15K in the previous month, and conditions are likely to improve as policy makers take unprecedented steps to shore up the ailing economy. Serving as a lagging indicator, unemployment is expected to rise at a moderate pace even as the economy recovers from its deepest recession since World War II as policy makers see a risk for a protracted recovery. Chancellor Angela Merkel, who was sworn in for a second term on October 28th, expects the economic downturn to “strongly affect” Germany throughout 2010 and push unemployment higher throughout the following year. As a result, the European Central Bank is widely expected to hold the benchmark interest rate at the record-low of 1.00% going into the following year in order to encourage a sustainable recovery. 01.04_TTN3

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 Euro 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 Euro 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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How To Trade This Event Risk

The Euro is likely to face increased volatility over the next 24 hours of trading as economists forecast unemployment in Germany to rise 5K in December, and the downturn in the labor market could weigh on the exchange rate as the Bundesbank anticipates the jobless rate to reach 10.1% in 2011. At the same time, the German central bank sees economic activity expanding at an annual rate of 1.6% in 2010 after contracting 4.9% this year, but stated that the growth forecast is “still subject to a high degree of uncertainty” as households continue to face fading demands for employment paired with tightening credit conditions. Moreover, a report by the Economy Ministry showed factory orders slumped 2.1% in October amid expectations for a 0.8% rise, while industrial outputs unexpectedly fell 1.8% during the same period, and business may keep a lid on production and employment this year as global trade conditions remain far from favorable. Nevertheless, the final GDP reading showed economic activity expanded 0.7% in the third quarter as businesses replenished their inventories, and conditions are likely to improve going forward as the expansion in monetary and fiscal policy continues to feed through the real economy. As a result, the Bundesbank said that the labor market remains “surprisingly robust” and expects the drop in employment to “moderate” over the coming months as the nation emerges from the worst recession since the post-war period, but went onto say the slump in “private consumption will likely have a damping impact” on the overall economy. In addition, the central bank noted that the “medium-term potential for growth was also damaged” by the financial crisis, with Bundesbank President Axel Weber maintaining a dovish outlook for future policy as the government expects inflation to average 0.9% this year and 1.0% in 2011. As policy makers aim to balance the risk for growth and inflation, the European Central Bank is widely anticipated to keep the benchmark interest rate at 1.00% this month in order to encourage a sustainable recovery, and may hold borrowing costs at the record-low throughout the first-half of the year as price growth remains below the 2% target.

Trading the given event risk favors a bearish outlook for the single-currency as market participants anticipate unemployment to rise in December, but the unexpected drop seen during the last five-month has certainly left the door open for an enhanced labor report. Therefore, if the economy adds 10K jobs or more from the previous month, we will need to see a green, five-minute candle following the release to confirm a buy entry on two-lots of EUR/USD. Once these conditions are met, we will set the initial stop at the nearby swing low or a reasonable distance taking, 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 cost once the first trade reaches its target in order to preserve our profits.

In contrast, the ongoing slump in global trade paired with fears of a protracted recovery may lead businesses to lower their temperament to retail their employees, and a rise in job losses is likely to drag on the exchange rate as market participants weigh the outlook for future growth. As a result, if unemployment rises 5K or greater in December, we will favor a bearish outlook for the single-currency, and will follow the same strategy for a short euro-dollar trade as the long position laid out above, just in reverse.

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