Thursday April 29, 2004 - 21:09:28 GMT
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Dollar Sinks On Disappointing GDP
Daily Forex Report 04-29-04
· US Q1 GDP 4.2% vs. Market Consensus of 5.0%
· Higher UK Consumer Confidence
· RBNZ Raises Rates By 25bp
The euro soared as US GDP growth in the first quarter fell short of expectations. Although economic growth accelerated from 4.1% to 4.2% over the past 3 months, the whisper number was as high as 6%. The market had overestimated growth in consumer spending, which increased by only 3.8%, as compared to consensus forecast of 4.2%. The dollar sold off as the market adjusted its positions on the belief that weaker growth will postpone the Fed tightening cycle. However, a closer look into the report may suggest otherwise. The personal consumption expenditures (PCE) index, which is one of the Fed’s favorite inflation measures, as well as the GDP price deflator and the employment cost index all increased in the first quarter. Rising inflation still provides hawks with an argument for a August rate hike. The PCE index increased by the fastest pace in three years. Meanwhile, in the Eurozone, French business confidence remained unchanged at 104, while Italian business confidence improved marginally. Money supply growth in the Eurozone remained steady at 6.3% yoy as inflation increased by less than expected in the month of March. Tomorrow’s harmonized index of consumer prices for the Eurozone is expected to provide more insight on the region’s inflation trend.
GDP has come and gone, which leaves Tuesday’s FOMC meeting the next major event risk for the US dollar. Today’s report was a bit weaker than expected, but higher inflation should keep interest rate expectations generally unchanged. Aside from a higher personal consumption expenditures (PCE) index and GDP price deflator, the employment cost index also increased by the largest amount in 22 years. Although rates are expected to remain unchanged, the market expects a more hawkish FOMC statement. We will be looking for 2 things 1) for the elimination of the word “patient” and 2) for a possible change in the assessment of inflationary vs. deflationary risks. Jobless claims for the week of April 24th fell from 345k to 338k. Tomorrow, we are expecting consumer confidence, personal income and Chicago PMI. Improvements are expected to be seen in all of the releases, particularly on the back of Tuesday’s strong consumer confidence survey and an upbeat manufacturing sector review by Market News International for the Chicago region.
The British pound recouped its extensive losses on the back of the weaker than expected US GDP report. After two consecutive months of deterioration, UK consumer confidence improved marginally during the month of April. The improvements came from a more optimistic outlook on current economic conditions and a stronger willingness to make major purchases. The housing data from Nationwide continued to report acceleration in the housing market. With the lack of economic data tomorrow and UK markets closed for holiday on Monday, the dollar should continue to drive movements in the pound.
After breaking above 111 in the early US session, USDJPY erased most of its earlier losses on thin trading during the first day of the Japanese Golden week holiday. Over the next 24 hours, we are expecting a few important Japanese economic data, including Tokyo CPI, unemployment and intervention data for the month of April. The MoF data is likely to show a sharp reduction in activity by the central bank, but any surprises could result in more volatile trading. Meanwhile, after increasing reserve requirements three times to slow economic growth, there are now reports that China’s government has instructed domestic banks to halt lending ahead of May 1st. China’s active measures to slow growth led the market to believe that slower Chinese growth would result in less demand for commodities such as gold. The expectation for reduced demand has caused the commodity currencies to tumble.
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