Mediocre GDP report keeps USD/JPY rangebound, BOJ on tap

Heading into this week, we suspected that today’s US Q3 GDP report could actually be more market-moving than the more widely-watched Fed meeting. And though that outlook definitively did not play out as expected, the GDP report still provided plenty of new information for traders to digest over the coming weeks.

On a headline basis, Q3 GDP grew at a 1.5% annualized rate, just below the 1.6% growth rate expected by economists. However, as experienced traders know, it’s critical to look below the surface of economic data releases, and this is arguably truer with GDP more than any other report.

The most sustainable and meaningful component of economic growth, Personal Consumption, rose 3.2% quarter-over-quarter, faster than overall GDP growth, but still a tick below the 3.3% the market was anticipating. The disappointing headline reading was driven primarily by a drawdown in inventories, which is generally not seen as a negative long-term factor, while business investment rose by a healthy 5.3%.

Crucially, the Core Personal Consumption Expenditures (PCE) inflation measure rose at just 1.3% q/q, below both the previous reading of 1.9% and the 1.4% growth traders had priced in. With the “data-dependent” Fed’s preferred inflation measure seemingly slowing down, there is now less pressure on the central bank to hike interest rates in December, yesterday’s hawkish statement notwithstanding.

Technical View: USD/JPY

The market’s reaction to today’s GDP report has been fairly subdued. The US dollar is actually nudging higher, with EUR/USD dipping 25 pips to 1.0935 and USD/JPY edging back toward 121.00. Focusing in on the second pair, USD/JPY remains within its recent 300-pip range from 118.50 up to 121.50. As long as rates remain within that zone, traders may want to favor fading any rallies above 121.00 or dips below 119.00.

That said, tonight’s Bank of Japan monetary policy meeting could be a major catalyst, especially if the BOJ opts to expand its QE program. In that case, USD/JPY could break 121.50 resistance, potentially opening the door for a retest of previous resistance around the 125.00 zone as we move through November.