Whattup, news traders? If you’re hoping to catch a big catalyst this week, stay tuned for the U.S. advance GDP release on Thursday at 1:30 pm GMT.
What do you think will happen? More importantly, how can you trade the event?
Here are the points you should know first:
What the heck is an “advance” GDP report?
In Economics 101, we’ve learned that a country’s gross domestic product (GDP) serves as a summary of how the economy fared during the reporting period.The U.S. releases three versions of its GDP: the advance reading, the preliminary reading, and the final reading.
As the first release, the advance GDP figure tends to generate the strongest reaction from the U.S. dollar, especially if the actual results come way below or way above expectations.
What happened last time?
The earlier advance GDP release showed the U.S. economy shrinking by 4.8% in Q1 2020, which was worse than the projected 4.0% contraction and enough to erase the earlier 2.1% growth. Later on, this was negatively revised to show a much larger 5% contraction.Unless you’ve been living under a rock, you’d know that most of the slowdown in economic performance was caused by the COVID-19 lockdown measures during the latter part of the first quarter.
As you can see from the chart above, the Greenback tumbled against most of its forex peers after the release, particularly against the higher-yielding commodity currencies.
What are traders expecting this time?
Fast forward to the middle of the year, the U.S. economy suffered even more drag on business and consumer activity as the pandemic worsened throughout Q2.Heck, number crunchers are estimating a whopping 34.5% GDP contraction for the period! That’s a double-digit decline yo!
Keep in mind that most U.S. states had been in lockdown mode in April and May, resulting in massive layoffs and business closures across the country. The Atlanta Fed even predicts that the economic situation was ugly enough to result in a 52.8% contraction.
How are the main GDP components looking?
- Headline retail sales slumped 14.7% in April before recovering by 18.2% in May then 7.5% in June, while core retail sales fell by 15.2% in April then rebounded by 12.1% in May and 7.3% in June
- The trade deficit widened to $54.6 billion in May from a shortfall of $49.8 billion in April
- Both imports and exports fell during these months as global demand took hits
- Core durable goods orders fell by 7.7% in April then pulled up by 3.7% in May and 3.3% in June, while the headline reading slumped 17.7% in April then recovered by 15.7% and 7.3% in May and June, respectively
How might the dollar react?
Dollar traders tend to have a knee-jerk reaction to headline numbers. Much stronger than expected results usually spur gains for the U.S. currency while weak data could lead to a selloff.However, market watchers already seem to have set the bar so low for the upcoming GDP report that the scrilla could wind up with a “buy the rumor, sell the news” reaction.
In other words, the dollar could start sinking prior to the actual release as traders price in downbeat figures, then profit-taking could happen when the numbers are printed.
News trading ain’t your thing? No worries, you always have the option to sit on the sidelines and wait for the dust to settle before figuring out a longer-term play.