Ways to reduce event risk

Consumer sentiment in the U.S. is anticipated to rebound in October, with economists forecasting the Conference Board’s index to rise to 54.0 after unexpectedly falling in the previous month, and the data is likely to spark volatility in the greenback as investors weigh the outlook for future growth. However, the University of Michigan confidence index foreshadowed a weakening outlook for household confidence as the index slipped more-than-expected to 69.4 from 75.5 in September, and the ongoing weakness in the labor market paired with the slump in wage growth may drag on the economic outlook as businesses continue to scale back on production and employment. A report by the Labor Department showed non-farm payrolls fell 263K in September amid expectations for a 175K decline, with the annual rate of unemployment rising to a 26-year high of 9.8%, and conditions are likely to get worse as policy makers see a risk for the jobless rate to reach 10% going into the following year. At the same time, consumer credit plummeted another 5.8% in August to mark the seventh consecutive monthly decline, with retail sales falling 1.5% in September, and households may scale back their willing to spending over the coming months as the Federal Reserve continues to see a risk for a protracted recovery. Nevertheless, the Fed’s Beige Book said that “gains in economic activity generally outnumbered declines,” with policy makers seeing “stabilization or modest improvements” in most districts, but went onto say that “virtually every reference to improvement was qualified as either small or scattered.” Moreover, the central bank said that employment remained “weak or mixed” in most regions as job losses intensified in 23 of the 50 states, and the FOMC is likely to maintain the benchmark interest rate at the record-low throughout the second-half of the year in an effort to foster a sustainable recovery. As a result, a dismal confidence report is likely to drag on the exchange rate as policy makers hold a cautious outlook for the economy, and the greenback may continue to underperform over the coming months as investors scale back long-term expectations for higher borrowing costs in the U.S.

Trading the given event risk favors a bullish forecast for the reserve currency as market participants anticipate household spending to improve in October, and price action following the release could set the stage for a short euro-dollar trade as policy makers see the economy emerging from the worst recession since the Great Depression. Therefore, if the index rises to 54.0 or higher, we will look for a red, five-minute candle following the release to confirm a sell entry on two-lots of EUR/USD. Once these conditions are met, we will set our initial stop at the nearby swing high or a reasonable distance, and this risk will establish our first objective. Our second target will be based on discretion, and we will move the stop on the second lot to breakeven if the first trade reaches its target in order to preserve our profits.

On the other hand, fears of a slower recovery paired with the rise in unemployment may lead consumers to hold a weakened outlook for the economy, and the unexpected decline during the previous month has left the door open for a dismal confidence report. As a result, if the index falls back to 51.0 or lower, we will favor a bearish outlook for the greenback, and will follow the same setup for a long euro-dollar trade as the short position mentioned above, just in reverse.