US GDP Annualized (4Q P) (13:30 GMT; 08:30 EST)
Expected: 0.8%
Previous: 0.6%

What Are The Markets Facing?

With the US dollar plunging to record lows against the Euro, it is very clear that bearish sentiment on the US economy is winning out in the markets. Will the next release of Q4 GDP change the tide for the greenback? The second estimate of expansion in the US during the last quarter of the year is expected to be revised up to 0.8 percent from 0.6 percent, and while this is still a sharp slowdown from Q3, the news will be a boon to the minority that argues that the US is neither in the middle of nor nearing a recession. On the other hand, if GDP is actually revised lower, the broad view of the economy will become even more pessimistic and talk of a US recession, or worse, stagflation, will grow louder. Meanwhile, Federal Reserve Chairman Ben Bernanke’s testimony to the Senate Panel on monetary policy may not be a big market mover, as the comments will likely mirror his rhetoric from Wednesday’s testimony to the House Panel. Nevertheless, traders should watch for the Q&A portion that will take place afterwards, as Bernanke will likely face fierce questioning from Senators. Furthermore, the US markets are ultimately going to respond to the Fed’s view on growth vs. inflation. During the last FOMC meeting in which the bank cut the fed funds rate by 50bp to 3.00 percent, Dallas Fed President Richard Fisher dissented as he thought “monetary policy was already quite stimulative, while headline inflation was too high at more than 3 percent over the last year.” The minutes of the January meeting also showed that the FOMC will not hesitate to reverse their rate cuts once growth prospects stabilize. As a result, there is a chance that Bernanke could come off sounding a bit hawkish on Wednesday and Thursday, but he is more likely to remain focused on the downside risks to growth..

Bonds – 10-Year Treasury Note Futures

Treasuries are consolidating tightly between the 20 SMA at 116-17 and 50 SMA at 115-14. Bernanke may have the overriding say on the contract’s next move, as his testimony to Congress on Wednesday and Thursday will be watched for signs that the Fed remains dovish and will cut rates in March (bullish for Treasuries). However, if he focuses on inflation – suggesting the FOMC may leave rates unchanged – Treasuries may plummet.

FX – EUR/USD

All major currencies have rallied strongly against the greenback as of late. The Fed and Chairmen Ben Bernanke are left with a continued sense of urgency. Two upcoming events will act as a gauge for monetary policy going forward. Preliminary, annualized, Q4Gross Domestic Product will be released Thursday. Expectations call for a release of 0.8 percent. The second and probably the most important will be Chairman Bernanke’s testimony to Congress today. Many are expecting his testimony to continue to show that the Fed is fully prepared to cut interest rates to fend off a recession. Fed fund futures are pricing in another 50bp cut by the central bank in March. A negative GDP revision could exacerbate an already weak dollar and lend support to more easing by the Fed. A positive revision may give proof that recent cuts have worked and that the economy may be steering away from a recession. Technically, the EUR/USD pair could continue to gain as Jamie Saettele’s Daily Technical Report calls for a target price of 1.5119.

Equities – Dow Jones Industrial Average

A daily chart of the Dow Jones Industrial Average shows that the index has run headlong into resistance at the 12,725 level, but given the fact that durable goods orders fell more than expected upon release on Wednesday morning, the Dow could reverse lower in the near-term. Furthermore, Fed Chairman Bernanke’s testimony to Congress on Wednesday and Thursday and US Q4 GDP figures - which may be revised – will only add fuel to the fiery recession debate. If Bernanke suggests that past policy actions may be enough to stave off recession, US equities will likely rally on the comments. On the other hand, if his focus remains trained on the downside risks to growth, the sentiment could weigh on the Dow further. Overall, the trend for stocks in the US remains bearish, and if Q4 GDP is revised even lower on Thursday, the news may drive the final nail into the coffin for the Dow.

Terri Belkas is a Currency Strategist at FXCM.