US Q4 GDP expected to be revised lower to 2.0%

Fundamental View

Yesterday saw major moves in the dollar space with the EURUSD and GBPUSD making lows on the session. The move started grinding lower in the morning but truly began to move once the releases of US inflation, Durable goods and Initial Jobless Claims posted. Although we saw an increase in the number of jobless claims this was partly due to the effects of the US public holiday at the beginning of the week so this was mainly overlooked by traders. Inflation numbers were the main catalyst for the extension lower as the core inflation held flat/ slightly higher. This move towards an inflationary environment led to the pricing in of USD strength due to expectations of the rate hike being brought forward. In tandem with this we saw three members of the Federal Open Market Committee hit the wires with hawkish comments. Bullard, a known hawk and a non-voter, was recorded saying that removing the patience language in March would allow more options going forward. Williams, a more moderate voter, also stated that the June meeting would be the time to take action. Finally Fed’s Mester, a moderate non-voter, stated that removing the patience language in March means that June is a viable option for hikes. Whilst these members are mostly non-voters the fact that so many moderates are moving towards the hawkish camp gives more credit to the contractionary argument. This led to confusion in US bourses whilst their European counterparts remained bullish for the session, with Greek risk being removed and the ECB quantitative easing programme ready to start next month. We also saw alarming figures from Japan and the possibility of a return to a real deflationary environment. Although we saw a print of 2.4% and above the Bank of Japan’s target of 2%, this is almost certainly due to the sales tax hike of 3% in April last year. This artificially brought inflation higher by 3% so in real terms we are seeing flat gain with deflationary risks return to the Japanese economy.

Today’s View

This morning we saw inflation reports from Germany, printing higher than previous from the regional readings. This caused some Euro strength going into the morning session and we have since pared some losses on the EURUSD pair and have also seen some strength go into the EURGBP pair. The higher inflation however hit German long term bonds the hardest as traders priced in inflation hurting the value of money over time. Ahead this afternoon we have some large data points to contend with; we have the second preliminary reading for the US GDP Q4, the Chicago Purchasing Manager’s Index, Pending Home Sales and also the University of Michigan Sentiment survey. US GDP is expected to be lower at 2.0% against the previous of 2.60% and is likely to be the large trade for the afternoon. A move to higher growth is likely to bring rate expectations forward and yield further scope for dollar upside.

Alternative view

All data-releases carry headline risk and are likely to move markets, especially ahead of month end. Month end often leads to higher volatility and volume so traders are recommended to remain cautious with trading the latter part of the European session. Please also be aware that we have rolled on T-notes and therefore will be trading the “M” contract.