TALKING POINTS – EURO, GDP, US DOLLAR, FOMC
- Euro may fall further as soft Q1 GDP bolsters dovish ECB outlook shift
- US Dollar may pull back as gradualist Fed clashes with hawkish markets
- Speculative positioning shows ample scope for longer-term USD gains
Eurozone GDP figures headline the economic calendar in European trading hours. A slowdown is expected in the first quarter, with output gain of 0.4 percent marking the smallest increase since the three months to September 2016. The on-year trend growth rate is expected to tick down for the first time in two years, registering at 2.5 percent.
Realized economic data outcomes from the single currency area have increasingly underperformed relative to consensus forecasts since the beginning of the year. That suggests analysts’ models are systematically overestimating the economy’s vigor, opening the door for a downside surprise on today’s release. That may encourage the recent dovish shift in ECB policy bets, weighing on the Euro.
The spotlight then turns to the Fed rate decision. No formal policy change is expected, though it quite telling of the markets’ hawkish disposition that the probability of a hike sits at a substantial 34 percent despite this being a “second tier” announcement without a forecast update or a presser. Investors will be most interested in the accompanying statement, looking for language ratifying the upshift in tightening bets.
The US Dollar set a 2018 high in the run-up to the Fed announcement having added 4.5 percent against an average of its top counterparts in a mere two weeks. A string of broadly supportive economic data outcomes and a hawkish rhetorical turn from previously dovish officials such as Governor Lael Brainard appears to have catalyzed the move.
The rally’s breakneck speed now naturally raises questions about scope for near-term continuation. Anything short of signaling the emergence of a four-hike consensus for this year on the rate-setting FOMC committee seems too impotent to sustain momentum. The Fed’s preference for gradualism probably won’t allow such excess, which may deflate the hawks’ more fanciful hopes and send USD lower.
Still, data from the CFTC showed that large speculators remained collectively net-short on the greenback as of a week ago. That is admittedly dated, but even a subsequent shift to a neutral or slightly net-long stance leaves a lot of room to rebuild exposure considering the heady readings that prevailed just 12 months ago. That might translate into a near-term pullback but ultimately precede a steadier long-term rise.
See our quarterly FX market forecast s to learn what will drive prices through mid-year!
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--- Written by Ilya Spivak, Currency Strategist for DailyFX.com
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