The US Dollar may turn lower while the Japanese Yen gains as soft US GDP data dents Fed interest rate hike bets and fuels risk aversion.

Talking Points:

  • Soft 4Q US GDP Data May Punish US Dollar, Drive Japanese Yen Gains

  • Euro Unlikely to Find Potent Catalyst in Soft Eurozone Inflation Figures

  • See Economic News Directly on Your Charts with the DailyFX News App

January’s flash Eurozone CPI data headlines the economic calendar in European hours. The benchmark year-on-year inflation rate is expected to slip deeper into negative territory, registering a 0.5 percent decline to come within a hair of the all-time low (-0.6% y/y) recorded in July 2009.

While a soft outcome will support the case for aggressive monetary stimulus, its impact on the Euro may prove limited. The ECB unveiled a large QE effort just last week, meaning another soft CPI print will imply relatively little for the near-term outlook andthereby offer no impetus for outsized volatility.

Later in the day, the spotlight turns to the preliminary set of fourth-quarter US GDP figures. Economists are penciling in an annualized growth rate of 3 percent, marking a slowdown from the 5 percent surge notched up in the third quarter and brings the pace of expansion back toward the near-term trend average (2.8 percent).

US news-flow has dramatically deteriorated relative to consensus forecasts over recent weeks however. That suggests analysts’ models are overestimating the vigor of the world’s largest economy, opening the door for a downside surprise. Such an outcome may weigh on the US Dollar as traders push back Fed rate hike expectations. It may likewise drive risk aversion amid worries the about the inability of US growth to offset malaise in Europe and Asia, triggering an unwinding of carry trades and boosting the Japanese Yen.

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