USD Rally Pauses Before Q1 GDP Revision
Jeremy Cook | May 29, 2015 05:26AM ET
Dollar looking to end the month strongly
The rally in the US dollar paused yesterday ahead of today’s GDP announcement from the States, with a little bit of profit taking the likely motivations. Up until a few days ago, the pound was the best-performing currency in the G10 this month but the dollar has stolen a march on sterling as we dip for the line at the end of May.
The broad fall-off in EUR/USD and weakness in the Japanese yen have combined with last Friday’s more optimistic US inflation and wage numbers. Today’s GDP report has had some of its sharper teeth removed thanks to last week’s good news but a dip into negative territory on the quarter cannot be completely disregarded.
Inflation the key internal of GDP announcement
As we have said countless times, the Federal Reserve and the Bank of England are the two central banks out there that people are expecting to raise rates in the next year, and for both, the key metrics for strength in their economies are rising wages and stable, positive levels of inflation.
Markets are looking at a figure of around -1% annualised for Q1. More importantly within the release is the latest reading of PCE – the Fed’s preferred inflation measure – and any sign of upwards pressures building will be looked upon favourably.
US GDP is due at 13.30.
Sterling lower as growth disappoints
After all the build-up for a positive revision to UK GDP for Q1, the data disappointed sterling watchers yesterday. GDP remained at 0.3% in Q1 with services growth revised lower and net trade knocking 0.9 percentage points off the total. The former is a surprise but is less of a long-term problem given the more encouraging numbers that we’ve seen in Q2. The issues around trade however are more pernicious – a strong pound has made UK exports much more expensive in the past year and the still weak Eurozone means our best customer is less able to trade with us.
It is my belief that speeches from Bank of England members may start to take on the pound soon, especially if GBP/EUR continues to rally higher.
Japan telling a familiar story
As we have written in today’s May ‘Currency Briefs’ – released this afternoon – the JPY is starting to rock and roll. After a brief period of consolidation in the past few months, JPY is back in the market crosshairs. Portfolio outflows have become synonymous with yen weakness and the re-emergence of the carry trade – borrowing in low yielding currencies to invest in higher yielding assets – can also be pointed to as a catalyst for currencies to take on the yen.
Overnight we saw Japan’s economy push out some pretty poor numbers. Inflation was flat compared to last year once food and the sales tax increase of last year are discounted away. Household and consumer spending collapsed unexpectedly, falling by 1.3% in April. I would be surprised if the Japanese authorities don’t step up the pressure and loosen monetary policy in Q3 of this year and the yen edges lower.
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The Day Ahead
Elsewhere, we have consumer confidence from the US at 15.00, which may go some way to eliminate any negativity from the US GDP announcement 90 minutes beforehand. As we have seen in the past six weeks or so, markets are still enthralled with the Greek situation and any headlines surrounding that will be picked over for further clues on an eventual resolution.
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