Press Release: EURUSD: Trading the German Unemployment Report

Germany’s labor market is expected to weaken for the fifth consecutive month in August, and a rise in unemployment may drag on the single currency as it raises the risk for a prolonged recession for the euro-area.

Trading the News: German Unemployment Change

What’s Expected:

Time of release: 08/30/2012 7:55 GMT, 3:55 EDT

Primary Pair Impact: EURUSD

Expected: 7K

Previous: 7K

DailyFX Forecast: 5K to 15K

Why Is This Event Important:

Unemployment in Germany is projected to increase another 7K in August and the ongoing weakness in the labor market may drag on the EURUSD as it dampens the outlook for the euro-area. As the region heads for a prolonged recession, a dismal report may encourage the European Central Bank to embark on its easing cycle throughout the second-half of the year, and we may see the Governing Council implement a range of tools to shore up the region as the debt crisis continues to drag on the real economy.

Recent Economic Developments

The Upside

The Downside

Greater demand from home and abroad paired with easing input prices may encourage businesses to increase hiring, and a downtick in unemployment may spark a bullish reaction in the EURUSD as it instills an improved outlook for growth. However, as business sentiment wanes, firms may keep a lid on their labor force, and a marked rise in unemployment may trigger a selloff in the exchange rate as it fuels speculation for additional monetary support.

Potential Price Targets For The Release

Indeed, the EURUSD stands at a critical juncture as it threatens the downward trend carried over from 2011, but the lack of momentum to push above the 100-Day SMA (1.2592) may ultimately produce a lower top in the exchange rate as the fundamental outlook for the euro-area deteriorates. In turn, we will maintain our bearish forecast for the EURUSD, but the pair may hold a narrow range ahead of the Jackson Hole Economic Symposium as the central bank conference takes center stage.

How To Trade This Event Risk

Expectations for a fifth consecutive rise in unemployment certainly casts a bearish outlook for the single currency, but a positive development may pave the way for a long Euro trade should the report dampen fears of a prolonged recession. Therefore, if the labor market improves in August, we will need to see a green, five-minute candle following the release to establish a long entry on two-lots of EURUSD. Once these conditions are met, we will set the initial stop at the nearby swing low or a reasonable distance from the entry, and this risk will generate our first objective. The second target will be based on discretion, and we will move the stop on the second lot to cost once the first trade hits its mark in an effort to protect our gains.

On the other hand, fears of a prolonged economic downturn may push businesses to scale back on hiring, and a dismal print may push the exchange rate lower as it dampens the outlook for growth. As a result, if unemployment rises 7K or greater in August, we will implement the same strategy for a short euro-dollar trade as the long position laid out about, just in reverse.

Impact that the change in German Unemployment has had on EUR during the last month

July 2012 German Unemployment Change

Unemployment in Germany increased for the fourth month in July, with the report showing another 7K rise, while the jobless rate held steady at 6.8% for the eighth consecutive month. The EURUSD traded lower following the report, with the exchange rate slipping below the 1.2250 figure, but the market reaction was short-lived as the euro-dollar ended the day at 1.2302.

— Written by David Song, Currency Analyst

To contact David, e-mail dsong@dailyfx.com. Follow me on Twitter at @DavidJSong

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