Will US Consumer Help Prop Up the Dollar?

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Market Drivers October 29, 2018
Markets quiet at the start of the week
Merkel loses ground in local elections
Nikkei -0.16% Dax 0.0%
Oil $67/bbl
Gold $1230/oz.
Bitcoin $6550

Europe and Asia:
GBP UK Mortgage Approvals

North America:
USD Personal Income/Spending 8:30

It’s been a very quiet start of trade in FX this week, with most majors barely tracing out 20 pip ranges in Asian and early European dealing.

The euro was steady despite further losses to Angela Merkel’s coalition in local elections in the state of Hesse. Ms. Merkel’s centrist coalition bled another 10 percent at the polls while both the right and the left wing parties recorded double-digit gains. Still, despite the clear setback, the coalition managed to preserve its majority for now and Ms. Merkel looks to lead Germany for another year at least, preserving stability in the region for the time being.

The euro held ground hovering near 1.1400 level and if equity flow in the region prove positive the pair could make a run towards 1.1450 as the day proceeds. After selling off hard last week on the persistent concerns over the budget battle between Brussels and Rome, EURUSD staged a strong rally on Friday with bull essentially setting up a higher double bottom in the pair.
If there is even a hint of negotiation between the two sides that would establish some sort of a compromise, the short covering flows in the pair could fuel quite a rally

Meanwhile, in North America, the only data worth of note is the Personal Income/ Personal Spending data. The market is looking for income to rise by 0,.3% while spending is forecast to increase by 0.4% both of which would be a healthy gain and suggest that US consumer continues to drive the US economy. However, if the data misses it could spark yet another round of risk-off flows as markets will assume that Q2 was peak growth for the US economy.

Friday’s US GDP data did little to assuage those fears despite printing at 3.5% versus 3.3% eyed. Fully 60% of the gain in GDP data was due to inventory building, meaning most of the growth was supply-side driven rather than demand driven. With consumption comprising more than 75% of the US economy, any sustained growth must be driven by the consumer which is why today’s spending/income numbers could prove to be a key. Any major miss could set USDJPY on a further selloff with bears testing the 111.50 level once again.

Boris Schlossberg
Managing Director

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