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Wednesday September 29, 2004 - 15:59:45 GMT -

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Forex: Dollar Rallies As US Q2 GDP Revised From 2.8% To 3.3%

DailyFX Fundamentals 09-29-04

By Kathy Lien, Chief Strategist of

· US Q2 GDP Revised From 2.8% To 3.3%
· Pound Weakens As BoE Barker Says ‘Rates Are At Cycle Peak’
· Japanese Retail trade Weakens More Than Expected


The rally in the euro is losing steam as the US economy reports faster than expected growth in the second quarter. Growth was revised higher to 3.3% from 2.8%. Although this is a slower pace than the 4.5% pace of growth experience in Q1, the latest report indicates that the expansion has a bit more momentum than the market initially expected. However, whether this momentum can be sustained still remains a question. For the second day in a row, oil prices breached $50 a barrel before erasing its gains later in the session. Consumer spending accounts for 70% of the economy so if oil prices continue its current trajectory, consumers may very well become increasingly nimble with their discretionary spending. Therefore Q3 growth still remains a concern, as oil remained expensive throughout the month of August and September. What we really have to monitor aside from oil is the trend of payrolls. As indicated by yesterday’s report, confidence slid in the month of September. If jobs continue to be difficult to find, it provides another reason for consumers to cut spending. As the engine of growth and source of demand for most of the world, contracting US growth will make it difficult for the global recovery to gather steam. However this is not a complete doom or gloom scenario. If payrolls do continue its upward trajectory, then it is only a matter of time that consumer confidence and spending will also accelerate.


The dollar gained ground against the euro with upward revisions in US GDP. Stronger growth came from higher inventory growth, business spending and rising exports. Personal consumption and the GDP price deflator were both unrevised in the final release. Aiding in the dollar’s rally were comments last night from FOMC voting member Hoenig. He was generally bullish on the US economy and expects the labor market to continue to rebound. He forecasts GDP to grow by 3.5-4.0% over the next 12 to 18 months and for inflation to remain low. Tomorrow we are expecting personal income, personal spending and Chicago PMI. Personal income is expected to increase by 0.4% in the month of August. Higher average earnings for the month of August was reported on September 3rd , with upward revisions to the July number as well. Unlike the tremendous disparity between income and spending in July, personal spending in August should only increase by a modest 0.1%. The latest retail sales data already indicates that general spending and spending on autos have been weak. Manufacturing activity in the Chicago region is expected to accelerate in the month of September. Meanwhile Switzerland released a weaker than expected KoF leading indicator report. The index remained unchanged at a downwardly revised 0.97. Although leading indicators still remain near a 3 1/2 year high, new orders weakened slightly while the order backlog “dynamism is declining somewhat.”


The British pound is sharply weaker today for a number of reasons. Economic data released overnight was generally negative. Although quarterly GDP increased to an expected 0.9%, annualized GDP increased a less than expected 3.6%. The current account deficit widened to a more than expected –GBP6.4billion while consumer confidence fell from –5 to –7. On the other hand, net consumer credit and net lending increased in the month of August. To top that off, Bank of England policy member Kate Barker said that the central bank may be shifting their monetary policy strategy and seeking to signal that rates may be at the peak of their cycle. On the back of broadly negative news, the yield on December short sterling futures have fell below the 5.00% mark, indicating that some are now believing that a final 25bp rate hike this year may not be in the cards.


The yen strengthened against the dollar as oil prices receded below $50 a barrel. Weaker economic data overnight failed to dent gains in the yen as its movements these days are closely tied to commodity prices. Large retail sales fell by a more than expected –5.4% y/y, while retail sales on an annualized basis fell –1.8%. Numbers on a monthly basis were slightly better (+1.0% m/m and –0.1% m/m respectively). Overall, domestic consumption has been weak, but have been improving gradually. Tonight’s Japanese industrial production report and Friday’s Tankan and CPI reports will be particularly important to watch and could result in some interesting price action in USDJPY.


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Mon 10 Sep 2018
AA 08:30 GB- GDP, Trade, Output
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