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Home » Technical Analysis » US 2Q GDP To Re-Affirm the Long Term Fundamentals in EUR/USD

US 2Q GDP To Re-Affirm the Long Term Fundamentals in EUR/USD

Fundamental Release: US 2Q GDP (1st release for 2nd Quarter)
Time: Friday, July 29th, @ 8:30AM ET (12:30PM GMT)
Forecast: 1.8% annualized rate, pr. 1.9% (1Q)
Pair(s): USD crosses

Importance of This Event:

The expectations for the 2nd quarter GDP is for a continuation of weak growth and continuation of a slow recovery. A slow growth rate sets the stage for tepid job growth and looser Fed monetary policy.

Reporting on futures prices shows that there is a 50% expectation that the Fed will raise rates to 0.5% in November 2012, more than a year from now, and that move is full priced in for Q1 2013. Those expectations around interest rates have moved further into the future as the US economy has sputtered during this most recent quarter, and the data we get on Friday is likely to confirm that weakness.

If we do have confirmation of weaker growth, that is an annual rate is lower than what we saw in the 1st quarter (1.9%), the USD is likely to remain pressured by its long term fundamentals – which is its disadvantage from an interest rate stance as the Fed continues to keep rates near zero.

As we can see in this daily view of the EUR/USD, the recent medium term bearish action in the pair goes against the longer term trend which was EUR positive and based mainly on interest rate expectations. While the GDP release on its own will not help this pair to break its current deadlock, a weak reading reminds us that these underlying fundamentals remain. And therefore as we get past the most recent turmoil, it sets the stage for the continuation of the long term upward trend.

Recent Background:

Let’s go ahead and review some of the headwinds that we saw in the US economy during the 2nd quarter:

  • Manufacturing sector was hit by the supply shortages emanating from Japan as a result of the earthquake/tsunami disaster which led to shutdowns of plants.
  • Consumer confidence and spending was hit by a double whammy in the form of higher energy, gasoline and food prices and an economy that saw tepid job growth in May and June.
  • Companies faced the uncertainty and concern surrounding the Euro-zone sovereign debt situation which blew up in May and has still yet to be fully solved, despite the initial optimism following the EU Summit.
  • And finally housing continues to bounce along the bottom as prices fall weakening the incentive to both sell homes (sellers would rather wait for a recovery and get a higher price) as well as to buy homes (buyers think they can wait for even cheaper prices in the future). Housing starts remain depressed as there is still a glut of unsold homes that can be had for cheap in the existing home sales market.

Put those factors together and we can see why economists expect 2nd quarter growth to be weaker than even what we had in the 1st quarter.

What to Expect from the Release:

In Friday’s release we want to see how bad things really were in the 2Q in terms of consumer spending, manufacturing, housing and trade. Only trade, out of these 4 sectors, can be said to have had showed some positive signs during the quarter and therefore the risks to the downside are larger than those to the upside, though the market would be more surprised from a better than expected result.

  • Consumer spending is expected to decelerate to show growth of 0.6% to 0.9%, much lower than the 2.2% we saw in the 1Q.
  • In the manufacturing sectors, motor vehicle sales are expected to subtract a full percentage point from GDP, after adding 1.18 percentage points in the 1Q.
  • Trade may add to growth, as there was a cutback in imports from Japan, but that positive contribution is expected to reverse in the 3rd quarter.
  • Investment in homes is expected to have declined as well.
  • Business investment may show some increase.

Negative Scenario for GDP:

If consumer spending fell more than anticipated then the outlook for 3rd quarter growth dims. Some of the manufacturing losses are expected to bounce back, but its really consumer’s confidence in jobs and as they face inflation pressures that are key to the recovery regaining its momentum. The US needs to see growth at around 2.5% annualized rate in order to knock back the unemployment rate which has climbed recently to 9.2%.

A weaker than expected reading will solidify expectations over Fed policy, and even a status-quo result will add pressure to the USD. Now, if by Friday we don’t have a resolution to the debt ceiling, then the GDP data may not be the top story in the NY session, and we have to make sure to monitor headlines in the short term regarding the debt impasse.

However in the long term, the USD would continue to face a strong headwind from the expectations of near-zero interest rates all the way through 2012 on the back of slow growth.

Positive Scenario for GDP:

If consumer spending and other sectors provide a surprise, and with the market positioned for bad news, that can give the USD a lift, though the debt ceiling overhand will cap any gains.

Stronger than expected growth in the US may provide short term relief for the USD, but it can also help to lift some of the worry that the global recovery – not just the US – may proceed at a slower than expected rate in the 2nd half of the year. That can help some of our higher yielders (EUR, GBP) and commodity and growth linked currencies (AUD, NZD, CAD) against our safe havens (CHF, JPY, and even USD).


Nick Nasad
Chief Market Analyst

Information and opinions contained in this report are for educational purposes only and do not constitute an investment advice. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness. FXTimes will not accept liability for any loss of profit or damage which may arise directly, indirectly or consequently from use of or reliance on the trading set-ups or any accompanying chart analysis.

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