- Bullish sentiments for the EURUSD ahead of the US GDP release
- Consumer confidence reported at a 7 year high
- US GDP expected lower than previous
- Medium term bias for the USD uncertain
In the markets, we have seen the sentiment for the dollar take a dive despite the bullish news coming from the US. Yesterday, the EURUSD experienced a 600 points gain which has now found rejection at the 1.267 level. The price is anticipated to go even higher in the medium term as the markets price in the data ahead. This is despite the bearish news for the Euro regarding the covered bond purchases from the ECB.
The market largely ignored the bearish release from Europe and instead took prices to the opposite direction. It is clear that the USD bears are dominating the price movements in the markets for most pairs. The GBPUSD yesterday registered also registered a 200 point move to the up side whilst the NZDUSD similarly had a 400 point fall.
USD bears driving the prices
The overall direction of the EURUSD pair right now seems to be driven entirely by the bearish outlook for the USD. Overall, the US economy has shown that its growthis quite strong and that in the long term, a steady growth trajectory can be reasonably anticipated. On one hand, the GDP readings for Q2 where quite impressive and beat all expectation to land at a 4.6% growth.
However the analysis for the performance in Q3 is somewhat less overwhelming. On the other hand, despite the CPI rate figures beating market anticipations and flattening over the period the zero change also means that overall the inflation acceleration was nil. In effect this means that despite the CPI increase flattening and the low unemployment at 5.9% the net increase in the pace of growth is now zero.
Flattening inflation in the US
Of course we must take into consideration the fact that the easing of the inflationary pressure can largely be attributed to the fall in commodity prices and in particular energy costs. In the end we find that the lowering of energy costs will ultimately have a net positive effect on the US economy until the mining within the US peaks off. However in the medium term, we see that the lower cost of energy is slipping into the wider economy and hence prices of goods and services must ease off in response.
This means that because of the intricate dependence productivity has on energy, even after we exclude the prices of transportation and petroleum products, the prices of other goods and services will experience less inflationary pressures. This lower inflation will show up in the calculation in the GDP just as we saw it in the flattened CPI rate. This hypothesis will of course entirely depend on the implied deflator that can be calculated from the GDP and whether the BLS will make adjustments to take the falling energy prices into consideration.
Putting it all together
The GDP is the most comprehensive measure of countries productivity. It has a positive correlation with the country’s currency on a trade weighted basis.
This means that for the dollar just the mere anticipation that the GDP growth reading will be lower than the previous reading will see the bearish USD sentiments start to price in the lower GDP. Under these conditions a cautious approach is to take profits for the USD long positions and look for another long entry after the bearish sentiments subside.
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