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A Contraction In U.S. GDP Supports Euro Bullish Technical Outlook

Friday, 30 January 2009 04:23:43 GMT  |  John Rivera, Currency Analyst

The U.S. economy is expected to have contracted by 5.5% in the fourth quarter as the fall out from the credit crisis crippled growth. Companies unable to generate cash flow through credit sources were forced to cut workers as they were unable to meet payroll expenses.

Fundamental Outlook

The U.S. economy is expected to have contracted by 5.5% in the fourth quarter as the fall out from the credit crisis crippled growth. Companies unable to generate cash flow through credit sources were forced to cut workers as they were unable to meet payroll expenses. The banking troubles also led to consumers and businesses retrenching which saw demand plummet and the downturn in the economy accelerate. The largest drop in growth since 1982 may weigh on the dollar and would support the bullish EUR/USD technical outlook. A better than expected print following the House passing the “Obama Stimulus” could be enough to spark optimism. That scenario could be dollar bearish if risk appetite leads to flows leaving U.S. treasury’s for riskier assets. However, the medium term effect could add dollar support as the U.S. economy will be viewed as the best poised to emerge from the current crisis and foreign demand for U.S. equities could push the greenback higher. In light of that view, greater contraction in the fourth quarter would support fears that the global economy is headed for a deeper recession and the risk aversion flows may spark a dollar rally.

 

Technical Outlook

I wrote yesterday that “I favor the count that treats the decline from 1.3333 and rally from 1.3116 as waves a and b of a flat.  Wave c would be underway now and end below 1.3116 prior to the resumption of the uptrend in wave 3.”  Wave c (and 2) may be complete at 1.3025, just below the 50% retracement of the advance from 1.2763 (1/23 high is at 1.3040).  To review; 5 waves up from 1.2763 indicate that the larger trend has turned up.  A drop below 1.3025 would not change the bullish bias.    

 

For More Technical Analysis Visit the Daily Technical Report

 

To discuss this report contact John Rivera, Currency Analyst: jrivera@fxcm.com

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