Sentiment towards the US economic outlook received another boost on Tuesday, following US GDP being revised significantly higher than first reported. This initially led to increased USD demand, which pressured metals and sent the Eurodollar back to 1.24. However, these moves were reversed shortly after when USD profit-taking was noticed. Some may attribute the USD softness yesterday afternoon as being encouraged by the consumer confidence reading slipping, but the USD weakness was noticed at least 45 minutes before this announcement.
Investors closing USD positions following another strong US economic performance was likely correlated to realisation hitting the market that - regardless of the strong data – the Federal Reserve remains at least six months away from raising interest rates. Although last week’s FOMC Minutes can be considered hawkish because they finally provided the potential timing for a US rate rise that the markets have been waiting many months for, the first US rate rise will be a considerable time away and it wouldn’t surprise me at all if investors continue to occasionally close USD positions over the upcoming months.
It is also possible that the profit-taking could have been inspired by a view among the markets that after such a strong Q3 annualised GDP figure (3.9%), economic momentum might slow down during the final period of the year. As of yet, there are no indications of the economic concerns outside of the United States impacting domestic growth. Although this afternoon’s Durable Goods data can provide more insight towards this, where a potential decline in business investment could reflect some caution among investors as they watch economic events unfold around them.
It was previously suggested that both the EURUSD and GBPUSD’s potential to move to the upside rested with USD weakness, and that’s exactly what we noticed on Tuesday afternoon. The Eurodollar extended to 1.2465, while the Cable climbed back to 1.57. Gold also bounced from support at $1190 and found resistance around $1205 for the fourth time in the past fortnight.
Prior to the US data inspiring some risk appetite into the markets, the Eurodollar was trading inside a very narrow 20 pip range with some confusion being shown among investors regarding whether the European Central Bank (ECB) will act again next week. Speculation that the ECB might introduce QE reached new heights following dovish comments from Mario Draghi last Friday, although I think it is far more likely that the ECB President was attempting to send the Eurodollar lower than actually warning QE will be introduced in December. It goes without saying that any further ECB stimulus will face strict opposition from the Bundesbank, especially with Tuesday’s improved German export data providing further signals that the German economy is turning the corner.
Before the Bank of England (BoE) Inflation Report testimony to the Treasury Select Committee, the Cable performed in line with expectations and threw away Monday’s 80 pip gains. The pair was expected to come under pressure when the BoE was quizzed regarding the likelihood of the UK entering a period of low inflation and GBPUSD felt the heat when the BoE expressed that there will be a severe drag on inflation over the next few months. When further quizzed on whether UK inflation would fall below 1%, Governor Carney stated that it’s more likely than not that inflation will fall below 1%, while it’s also more likely than not that he would need to write a letter to the UK Chancellor explaining why. The BoE’s views on weak price pressures have also been strong, with them likely to become even stronger over the next few months.
Overall, the BoE’s testimony to the Treasury Select Committee continues to point towards the direction that any interest rate rises will be delayed for potentially one year, which is going to limit investor attraction towards the GBPUSD moving forward. To be honest, there was minimal hawkishness from the BoE on Tuesday, although Governor Carney saved the GBPUSD from falling further when he reiterated that the next move will be a rate rise, not further monetary easing. Later this morning, confirmation of the UK economy expanding by an annualised 3% in the third quarter should be a reminder to investors that although the BoE will not be raising rates, the UK fundamentals remain strong.
Unless widespread USD weakness is around the corner, I favour this pair continuing to consolidate between 1.56 and 1.57 for the remainder of the month.
Comparebroker is a comparison site and we spend hundreds of hours to keep the information up to date. However, users are advised to do their own due diligence and nothing can be perceived any advise. The content on the website is purely for education purposes only
Recommended Content
Editors’ Picks
EUR/USD stabilizes near 1.0800 as trading action turns subdued
EUR/USD holds steady near 1.0800 on Thursday and remains on track to end the day in negative territory following upbeat macroeconomic data releases from the US. The action in financial markets turn subdued as trading volumes thin out heading into Easter holiday.
GBP/USD extends sideways grind above 1.2600
GBP/USD fluctuates in a narrow channel above 1.2600 on Thursday. The better-than-expected Initial Jobless Claims data from the US and the upward revision to the Q4 GDP growth help the USD stay resilient against its rivals and limits the pair's upside.
Gold pulls away from daily highs, holds above $2,200
Gold retreats from daily highs but holds comfortably above $2,200 in the American session on Thursday. The benchmark 10-year US Treasury bond yield stays near 4.2% after upbeat US data and makes it difficult for XAU/USD to gather further bullish momentum.
XRP price falls to $0.60 support as Ripple ruling doesn’t help Coinbase lawsuit against SEC
XRP programmatic sales ruling by Judge Torres was completely rejected by another US Court that ruled in favor of the SEC in a lawsuit against Coinbase.
Portfolio rebalancing and reflation trades emerge into Q2
Yesterday’s price action pointed at a possible end-of-quarter portfolio rebalancing as the session saw the laggards of the quarter like Apple and Tesla gain, and the stars like Microsoft and Nvidia retreat.