Will US GDP Extend the Dollar Rally or Break It?

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Market Drivers October 29, 2015

GE Unemployment
AU New Home Sales decline
Nikkei 0.17% Europe -0.01%
Oil $45/bbl
Gold $1158/oz

Europe and Asia:
AUD New Homes -0.4% vs. 2.3% last
EUR Unemployment -5K vs, -4K
GBP Mortgage Approvals

North America:
USD Advanced GDP 8:30

USD Weekly Jobless 8:30

USD Pending Home Sales 10:00

Most major currencies stabilized against the dollar in generally subdued Asian and early European trade today as markets continued to absorb the FOMC statement from yesterday’s meeting. As many analysts have pointed out four words from the Fed shook up the market when the communique stated that ““at its next meeting” US policymakers may consider a rate hike.

The reaction from the currency market was sudden and swift as EUR/USD dropped below 1.0900 while USD/JPY soared above 121.00, but as is so often the case the flows are starting to reverse during the post FOMC session as traders reconsider the rhetoric.

We believe the Fed’s actions are now driven much more by political rather economic considerations with policymakers under increasing pressure to move off the zero band standard. The fundamentals so far do not warrant any such action. Inflation in US economy remains non -existent tempered by lower energy prices and very muted wage gains. Growth is positive but hardly torrid and real estate prices are nowhere near the bubble like conditions pre-2008.

In short the Fed could easily wait another quarter before tightening monetary conditions, but FOMC members appear to be eager to normalize policy sooner rather than later and yesterday’s communique hinted that they would do that barring any sudden drop in final demand.

Even if the Fed hikes rates in December it is very likely that policymakers will follow the one and done pattern holding off on any further tightening for the near term horizon. Such a scenario would still be dollar bullish but in a limited fashion and the greenback isn’t likely to get much of boost until the market believes that the tightening cycle commences in earnest.

Meanwhile on the eco front German unemployment data proved to be a minor support to the euro as the jobless rolls declined by another -5K versus -4K eyed. The positive labor data is a good sign for Eurozone’s largest economy especially in light of the recent VW scandal and suggests that the fallout from that event may be minimal for the time being.

In North American session the focus will turn squarely on the Q3 GDP data due at 12:30 GMT. Coming on the heels of the FOMC statement the number will be even more scrutinized than usual as traders look for signs of growth in the US economy. The number is expected to decline to 1.5% from 2.1% the period prior, but if it surprises to the upside it will provide yet another reason to believe that a December Fed hike is imminent. A miss however could quickly dampen expectations and EUR/USD could climb back above 1.1000 while USD/JPY drops to 120.00 as dollar shorts resume their work.

Boris Schlossberg
Managing Director

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