Pause in USD

FX markets have paused their aggressive demand for USD. Perhaps there is trepidation ahead of today’s release of the first estimate of US 1Q GDP. Assessments of economic activity in 1Q have shifted widely in the last couple of months, reflecting changing views on consumer spending and outlook for global trade. Markets are forecasting an increase of 1.8%, yet balance is for an upside surprise in our view. While this growth read will be the slowest in nearly two years, it remains a solid number. Deeper slowdowns will have analysts quickly point to the flat yield curve and calling for late 2019, early 2020 recession. However, in our view, there needs to be a shock to the labor markets, which paralyze consumer spending before considering consecutive quarters of negative GDP growth. Low unemployment at 4.0% and a steady improvement in wage growth (accelerated from 3.4% to 3.8% over the last year) will protect from temporary shocks. However, the strong labor market also creates a risk, should regular restructuring of blotted headcount, triggers wider layoff worries. Yet, even this feels a distant risk. In the current macro backdrop, we remain constructive on the USD against G10 based on the solid economic outlook, corporate earnings driving stocks and wide interest rate differentials.

While in the EU, concern near term will likely be on the Spanish general election. Spanish parliament will likely become further fragmented with the balance of power shifting to the socialist PSOE. Despite heavy short Euro positioning, improvement in eurusd is unlikely without a fundamental shift.

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