US Dollar Gains Following Strongest US GDP in Seven Years, Japanese Yen Up as Equities Remain Under Pressure

US Dollar Gains Following Strongest US GDP in Seven Years, Japanese Yen Up as Equities Remain Under Pressure
The US dollar climbed across the majors following the advanced reading of US GDP, which was surprisingly strong in Q4 as the annualized rate of growth surged 5.7 percent, the fastest pace in seven years. While the greenback was able to maintain its strength against currencies like the euro and British pound, it subsequently fell against the Japanese yen as US equities drifted lower. The biggest single contributor to the expansion, by far, was growth in inventories as businesses stocked up in anticipation of greater demand. Other contributors to GDP included personal consumption and exports, indicating that domestic and foreign purchases alike provided a boost to the US economy. That said, the sustainability of the recovery may be called into question once firms finish stocking up and find that consumers are still contending with high levels of unemployment.

Looking ahead to next week, Monday will start out with the January reading of ISM manufacturing, which is projected to slip to 55.2 from 55.9. Nevertheless, this would still indicate an expansion in US business activity for the sixth straight month. Indeed, production, new orders, and export orders gained steadily throughout Q3 and Q4, highlighting how the manufacturing sector has been key to recovery in the US. Furthermore, the employment component may help to serve as a gauge of how US non-farm payrolls will fare on February 5. That said, manufacturing-specific reports like the Dallas and Richmond Fed indicators have signaled improving conditions during January, creating some upside risks for ISM manufacturing.

Related: Discuss the US Dollar in the DailyFX Forum, Top 5 Events for the Week of January 25

Canadian Dollar Mostly Stronger as Canadian GDP Rises for Third Month
The Canadian dollar held its own against most of the majors, with the exception of the US dollar, as GDP for the month of November showed that the Canadian economy expanded more than expected. Indeed, GDP rose 0.4 percent during November, marking the third straight month of growth as wholesale services output surged. Other components, such as industrial production and energy output underpinned the increase as well. Overall, though, the data isn’t likely to have a huge impact on the Bank of Canada’s monetary policy stance, especially since other reports showed that industrial and raw materials prices slumped in December. During the Bank’s last meeting, policy makers reiterated that they will leave rates at a record low of 0.25 percent through the end of Q2 unless the inflation outlook shifts. Based on the latest readings of input costs, though, inflation risks may actually still be to the downside.

Related: Discuss the Canadian Dollar in the DailyFX Forum

Australian Dollar Down with Commodities - RBA Expected to Raise Rates Next Week
The Australian dollar was the weakest of the majors on Friday, losing over 1 percent against the greenback, as commodity prices came under pressure. Event risk for the currency will pick up next week. According to Bloomberg News, the Reserve Bank of Australia (RBA) is likely to raise rates for the fourth straight month by 25 basis points to 4.00 percent. Meanwhile, Credit Suisse overnight index swap (OIS) rates are pricing in a 67 percent chance of a 25 basis point rate increase, signaling a slight risk that the central bank will not follow through. Looking even further ahead, OIS rates are pricing in 98 basis points worth of hikes over the next 12 months, which is down substantially from October, when they were pricing in just over 200 basis points in increases. As a result, the RBA’s rate decision and policy statement could prove critical to the AUDUSD outlook in the near-term. The RBA struck a more neutral tone during their last meeting, but with Q4 CPI results signaling that inflation is on the rise, tighter monetary policy seems to be in the cards. However, another neutral policy statement that suggests the RBA will leave rates unchanged during their next meeting could ultimately weigh the Australian dollar down.

British Pound Down Despite Jump in UK House Prices - BOE May End Quantitative Easing
The British pound lagged as GBPUSD broke down from a wedge formation and EURGBP bounced from support at 0.8653. The only UK data on hand was actually positive, as the Nationwide house price index rose for a ninth straight month in January, this time by 1.2 percent, which pushed the annual rate up to a 2+ year high of 8.6 percent from 5.9 percent. Looking ahead to next week, the Bank of England (BOE) is anticipated to leave rates unchanged at 0.50 percent on Thursday at 7:00 ET, but this won’t even be the market-moving part of the announcement. Instead, traders will be looking toward the BOE’s policy statement, which has consistently been the prime “news event” of recent rate decisions. Last month, the BOE indicated that they would likely wait until their February meeting before considering any changes to the Asset Purchase Facility (APF), which is currently aiming to purchase £200 billion worth of high quality assets. At this point, the markets are betting that the BOE will end the program altogether, which has to the potential to push the British pound higher. However, if the central bank suggests that they could still add to the program later in the year, the currency is likely to falter.
    
Related: Discuss the British Pound in the DailyFX Forum

Euro Mixed as Euro-zone CPI Rises Less Than Expected, Unemployment Climbs
The euro continued to plunge versus the US dollar, but was mixed against many of the other majors. Euro-zone CPI estimates were a bit weaker than expected, as the annual rate posted at 1.0 percent for January, up from 0.9 percent in December. Meanwhile, the region’s unemployment rate rose to 10.0 percent in December from a revised 9.9 percent, suggesting consumers are still feeling the impact of the global economic slowdown. Next week, the European Central Bank is anticipated to leave rates unchanged at 1.00 percent at 7:45 ET. Where the currency ends the day, though, may have more to do with what ECB President Jean-Claude Trichet says during his post-meeting press conference at 08:30 ET. Traders will likely focus on any comments regarding the future of interest rates in the region, including statements on exit strategies for the central bank’s liquidity programs, the economic outlook, and how they may deal with Greece’s fiscal problems (if at all). At the time of writing, Credit Suisse overnight index swap rates were pricing in 85.2 basis points worth of hikes by the ECB over the next 12 months, but indications that the central bank foresees a quicker recovery in growth or inflation could push these expectations, and the euro, higher.

Related: Discuss the Euro in the DailyFX Forum,

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