29 Apr 2019: “Mixed bag” GDP halts dollar’s advance

29 Apr 2019: “Mixed bag” GDP halts dollar’s advance

Weak inflation overshadows GDP

April 29th: Highlights

  • Fed meeting unlikely to provide a much of a clue to long-term intentions
  • The hits to the single currency just keep on coming
  • Sterling awaits Government’s Brexit move

“Mixed bag” GDP halts dollar’s advance

The positivity that had been seen in the market over most of last week came to an abrupt halt on Friday. Despite significantly stronger headline GDP data than had been expected, the makeup of the 3.2% YoY growth was subject to some question. Delving beneath the surface of the figures, the data was subject to a series of “one-offs” that are unlikely to be repeated.

There had been a growing sense that the Fed’s approach to further rate hikes was going to be proven to be over-cautious as speculation grew of a stronger than expected GDP number which had led the dollar index to rally close to two-year highs.

Finally, following the release of the data the dollar suffered from the market adage of “buy the rumour, sell the fact” and as confusion returned and the Fed’s caution was again proven correct, the dollar index retreated.

Also released on Friday was the Fed’s preferred measure of inflation, the core personal consumption expenditures data. This was lower than expected, leading to further doubt about the Fed’s need or desire to continue rate hikes.

The FOMC meets this Wednesday and has been the case with the past few meetings it is the statement from the Chairman following the meeting rather than the outcome of the vote on short-term rates that will carry the most significance.

Given the “mixed bag” of data releases seen over the past few weeks, Jerome Powell is likely to reaffirm the Fed’s wait and see approach dominated by data dependency.

On Friday, the dollar index fell to a low of 97.84 before recovering to close at 98.04.

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Euro remains subject to weak data and the gyrations of the dollar

It is almost impossible for traders to find any positivity in the current economic conditions that have engulfed the Eurozone. Various forward and backwards looking data releases, confidence indices, and activity indicators have been “pointing south” for most of the year so far.

However, the fall in the single currency can be characterized by its lack of urgency and its, relatively, solid base. Growth forecasts for the whole of 2019 have been slashed by the ECB and this week we will get to see just how bad the situation is in reality as the Q1 GDP data will be released tomorrow.

Later this morning, consumer confidence together with services and manufacturing sentiment data will be released. While this is considered “tier two” data when compared to the Markit PMI’s that will be released on Thursday, it provides a further indicator of perceptions for the economy.

GDP growth is expected to be 1.1% YoY with Q1 contributing 0.2%/0.3% to the figure. The positivity which surrounded the lead up to the U.S. growth data is singularly absent from the Eurozone and fears of an even lower read could be realized although there is very little expectation of a contraction.

The view of analysts is that either Q1 or Q2 will be the low for the economy and it will start to improve in H2. That is clearly the expectation (hope) of the ECB. They don’t meet until May 8th and that will be a non-monetary policy meeting although Sr. Draghi will undoubtedly be expected to field questions on the economy.

On Friday, the euro rallied a little off the back of the declining dollar index, reaching a high of 1.1174. It closed the week at 1.1148.

Sterling awaits revised Brexit plans

The financial market appears to have taken its lead from the general public in the UK becoming de-sensitized to Brexit and the speculation that has now taken over from hard news over what the next move will be. With the main parties preparing for the local and European Parliamentary elections a significant indicator of how the public sees the Brexit negotiations is on the horizon.

With the Conservatives hoping that the UK’s participation in the European elections won’t be necessary, Labour in the process of changing its message to one of support for a second referendum under certain circumstances and the Liberal Democrats campaigning on a “stop Brexit” platform, the divide between the parties is a wide as ever.

There has been very little solid output on Brexit from the Government over the past few days and there is speculation growing that Mrs May’s hopes of bringing the Withdrawal Agreement before MPs for the fourth time are meeting opposition from both within her own Party and from the Speaker.

With this Thursday’s local elections expected to show a considerable protest vote against the main parties, it is unlikely that a General Election will be called in the next few months unless there is a major development in Parliament. One of the possible outcomes has, for now at least, been removed from the table. This makes a straight choice between no deal and “May’s deal” as the two most likely outcomes since a second referendum would bring (even more) chaos to the Conservative members.

On Friday the pound in concert with the euro rallied versus the dollar. It reached a high of 1.2944, closing at 1.2915.

Have a great day!

About Alan Hill

Alan has been involved in the FX market for more than 25 years and brings a wealth of experience to his content. His knowledge has been gained while trading through some of the most volatile periods of recent history. His commentary relies on an understanding of past events and how they will affect future market performance.”