Talking Points:
- The initial Q1’19 US GDP report is due on Friday, April 26 at 12:30 GMT.
- Q1’19 US GDP expectations come in between 1.4% and 2.8%, but the trend is clear: the US government shutdown impact was limited, and the Fed isn’t likely to cut rates anytime soon.
- Retail traders are fading US Dollar gains, and the outlook for EURUSD has turned bearish.
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04/26 FRIDAY | 12:30 GMT | USD GROSS DOMESTIC PRODUCT (1Q A)
For much of the first quarter, there was great concern that the US government shutdown between December 23 and January 25 would have a significant negative impact on Q1’19 US GDP. And while the Congressional Budget Office estimated that a net $3 billion in wages would be lost, ultimately, it appears that the underlying strength of the US economy will have prevailed past the government’s self-inflicted wounds.
The Bloomberg News survey is calling for US GDP to come in at 2.2% annualized. Depending upon where you look, estimates vary. The New York Nowcast estimate for Q1’19 US GDP is only at 1.4%, while the Atlanta Fed GDPNow model is pointing at 2.8% growth. Regardless, it does appear that any near-term concerns about the US economy dipping into a recession were overblown.
As such, rate expectations have evolved in a manner to suggest that market participants no longer feel the Federal Reserve will embark on a dovish policy course in the imminent future. In fact, at the end of March, Fed funds futures were pricing in greater than a 50% chance of a 25-bps rate cut by July 2019; now, markets are favoring the Federal Reserve to stay on hold for the rest of 2019.
Such a dramatic shift in expectations in just the span of a few weeks has proven helpful to the US Dollar as it has pushed through multi-month resistance dating back to November 2018, pushing to fresh 2019 highs ahead of the US GDP report this week.
Pairs to Watch: DXY Index, EURUSD, USDJPY, Gold
EURUSD Technical Forecast: Daily Price Chart (January 2018 to April 2019) (Chart 1)
Mirroring receding Fed rate cut expectations, the DXY Index's push to fresh 2019 highs has resulted in EURUSD being dragged down to fresh yearly lows (the Euro is 57.6% of the DXY Index, after all).
Breaking down through the March swing low (established on the day of the ECB meeting at 1.1176), EURUSD has now fallen to its lowest level since June 2017; and that is where support has been found, at the June 2017 swing low at 1.1119 so far.
Momentum is clearly to the downside right now for EURUSD - price is below the daily 8-, 13-, and 21-EMA envelope, and both daily MACD and Slow Stochastics are trending lower in bearish territory -- but the move to June 2017 swing support offers a moment for pause. Only a move below 1.1119 around the US GDP report would suggest continuation lower; otherwise, traders may want to wait for a better price to reengage.
IG Client Sentiment Index: EURUSD (April 25, 2019) (Chart 2)
EURUSD: Retail trader data shows 69.9% of traders are net-long with the ratio of traders long to short at 2.32 to 1. In fact, traders have remained net-long since Apr 12 when EURUSD traded near 1.12974; price has moved 1.3% lower since then. The number of traders net-long is 11.2% higher than yesterday and 32.5% higher from last week, while the number of traders net-short is 20.0% lower than yesterday and 19.6% lower from last week.
We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests EURUSD prices may continue to fall. Traders are further net-long than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger EURUSD-bearish contrarian trading bias.
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--- Written by Christopher Vecchio, CFA, Senior Currency Strategist
To contact Christopher, email him at cvecchio@dailyfx.com
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