US GDP is Key for Dollar Expectations

Market Drivers February 27, 2015
EZ CPI shows signs of deflation moderating
Japanese data mixed
Nikkei 0.06% Europe -0.21%
Oil $49/bbl
Gold $1205/oz.


Europe and Asia:
AUD Private Sector Credit 0.6% vs. 0.5%
EUR EZ CPIs all hotter

North America:
USD GDP 08:30
USD Chicago PMI 09:45
USD Pending Homes 10;00

It was a quiet, aimless night of trade on the last business day of the month with most majors trapped in 30-50 point ranges as markets were content to consolidate ahead of the key US GDP data later in the day.

The euro which was shellacked yesterday in the aftermath of hotter US CPI data was able to stabilize and find some buyers on the back of hotter than expected CPI data of its own. as reports from Germany Italy and Spain all showed than deflationary pressures were easing. In Germany and Italy prices turned positive while in Spain the flash CPI came in at -1.1% vs. -1.5% eyed.

The news provides the first shred of evidence that the the EZ may have turned the corner on deflation as price levels are finally starting to rise. If the trend persists for the next few months the ECB may feel less pressure to ease and that should provide some support for the euro which responded positively to the news rising to within a few pips of the 1.1250 level.

The big focus today however is going to be on US Preliminary GDP data for Q4. The market is looking for a slight contraction to 2.0% level from 2.6% the period prior. However, any upside surprise would only add to the preponderance of data that shows US economic activity accelerating. If the number comes in anywhere near the 2.5% range the market is likely to react very positively lifting USD/JPY through the 120.00 figure.

Although the Fed has continued to remain noncommittal with regard to normalization, another relatively strong quarter of 2.5% growth would create a chorus of critics calling on the Fed to begin rate hikes by June rather than September. Strong job growth, the best wage growth since 2008 and a 2.5% GDP would provide compelling arguments to hike rates sooner rather than later. On the other hand if the GDP data misses the disappointment could push USD/JPY well into 118.00s as traders temper their expectations until fall 2015 as the earliest.