Everything You Need to Know to Trade the U.S. GDP

If you want to learn about the current state of the U.S. economy, look no further! Today, I’m going to do an in-depth analysis of the broadest measure of economy activity, the GDP report. In addition, I’ll examine how it could affect price action to assist you in your forex trading.

First things first! You have to know that there are three versions of the U.S. GDP report: the advance, the preliminary, and the final. Since the advance report is the first to be released (even though it is incomplete and relies on some estimations), it usually has the biggest impact on the Greenback’s price action.

The advance GDP will be released on Thursday at 12:30 pm GMT. It is expected to show that the U.S. economy expanded 2.5% in Q3 2011, which is better than the 1.3% growth seen in the previous quarter. It seems economists have become more optimistic with their forecasts, considering that just last month, they had predicted Q3 2011 growth to come in at 1.9%.

The higher forecast seems to be driven mainly by strong consumer spending. Retail sales for September exceeded market expectations and printed a 1.1% growth. Analysts believe that this should contribute to a year-on-year growth in consumer spending of 1.9% in Q3 2011, a huge improvement from the 0.7% rate experienced during the second quarter. Since consumer spending makes up two-thirds of GDP, it will likely have a huge effect on the advance report.

Reports related to business investment were also better than expected last quarter, which contributes to the overall positive forecast. According to Bloomberg, multi-billion dollar companies such as Macy’s and Khol’s have plans to increase hiring since demand has picked up.

Trade is expected to have a positive impact on GDP as well, although it probably won’t be as big as that of consumer spending. Exports surged in Q3 2011, posting record highs in both July and August on a very healthy demand for U.S. goods in Asia and Latin America. Apparently, overseas customers went gaga for capital goods and autos during the period as shipments of these goods hit all-time highs in July!

But even with all these positive bits of feedback, the economy still had its fair share of sore spots last quarter. Employment, household income, and the housing industry were still down in the period, and as such, they present considerable downside risks to the headline GDP figure.

Now to ask the million dollar question: How will this report affect EUR/USD?

Let’s take a look at EUR/USD‘s daily chart to find out!

Daily Chart of EUR/USD

As pointed out by Big Pippin, 1.4000 is a key level for EUR/USD. Not only does it line up well with the 61.8% Fibonacci retracement level, but it’s also an established area of interest. If you take a close look, you’ll see it acted as a floor for price for about six months. That being the case, it may very well act as resistance over the coming days.

So where does the U.S. advance GDP report come in? Well, think of it as a potential catalyst for a major bounce off or break of the 1.4000 handle!

At this point in time, it’s hard to say whether the results of the report will ultimately be bearish or bullish for the dollar. However, following the framework of the Dollar Smile Theory, we can come up with several scenarios that detail the report’s possible outcomes and their subsequent effects on dollar price action.

On one hand, terribly disappointing data could lead to risk aversion and a dollar rally. Likewise, the dollar may strengthen in the event that economic growth in Q3 2011 proves to be much more robust than expected. But on the other hand, we can’t rule out the possibility that the recent dollar sell-off could accelerate if the results fail to please investors.

The key to playing this report is to stay flexible. Being open-minded and waiting for the right market signals could just help you catch a 150-pip move!