US Dollar Reaction To GDP Short-Lived – Will NFPs Have A More Lasting Impact?

The release of US GDP figures proved to spark volatility for the US dollar on Thursday in a rather unexpected way. Indeed, while Q2 GDP accelerated 1.9 percent – up from 0.9 percent in Q1 – that was actually weaker than forecasts of a 2.3 percent gain. However, the most disappointing factor of this report that helped drive the US dollar lower initially was the downward revision of Q4 2007 GDP down to -0.2 percent from 0.6 percent, which marked the first negative reading since Q3 2001. This highlights the importance of revisions to key economic indicators as this was only the advanced release of Q2 GDP, and with two more rounds – preliminary and final – coming up during the next few months, today’s reports are by no means the final word on the status of economic expansion in the US. Yet, the greenback bounced right back within a few hours, leaving the currency virtually unchanged from yesterday’s close and suggesting that the US dollar rally may have further to go.

Nevertheless, there’s major event risk for US assets on Friday: non-farm payrolls. This is THE biggest market-mover for the US dollar on a short-term basis, and Friday is unlikely to be any sort of exception as the data is anticipated to reveal job losses for the seventh consecutive month. As we’ve noted in our NFP Preview, “Over the past 3 decades, the US economy has gone through 3 recessions, according to NBER. In each of those 3 recessions, there was a string of job losses that lasted for a minimum of 10 months.” As the number of negative NFP readings quickly adds up, the risks that we are currently in the midst of an economic recession increase. However, the forex markets are infamous for reflecting the short-term view, and if NFPs actually prove to be slightly better than expectations for a drop of 75K, the greenback could actually appreciate at 8:30 EDT. Furthermore, NFPs rarely have a lasting impact on price action beyond a few hours, and on a few occasions since the start of the year, the US dollar has actually had the opposite reaction to the sentiment reflected in the data on hand (strengthening when NFPs disappoint, and vice-versa). As a result, it is worthwhile for even the most fundamentally-focused traders to keep technical factors in mind.

Euro Slide May Continue On German Retail Sales, Swiss CPI Hits Nearly 15-Year High

Despite a pop higher during the US trading session, the Euro remains soft following a morning of mixed economic data. On one hand, the number of unemployed workers in Germany fell in line with expectations by 20,000 while estimates for Euro-zone CPI show that price growth accelerated to an annual pace of 4.1 percent, which marks a fresh 16-year high and is well above the European Central Bank’s 2 percent target. On the other hand, the Euro-zone unemployment rate picked up to 7.3 percent from 7.2 percent, pointing to broad weakening in the European labor markets. Clearly, inflation pressures persist throughout the Euro-zone, but will it be enough to convince ECB President Trichet to raise rates further. Unlikely. Recent PMI reports that indicated a contraction in business activity in both the services and manufacturing sectors are probably just the tip of the iceberg in reference to the slowdown in the Euro-zone’s economy, and given these circumstances, Mr. Trichet will have little room for maneuver in coming months when it comes to monetary policy. Looking ahead to Friday, German retail sales could weigh on the Euro, but more likely will simply serve as a good leading indicator for the composite Euro-zone report next week. Meanwhile, Swiss CPI slipped 0.4 percent during the month of July, but surged to a nearly 15-year high of 3.1 percent from a year earlier. Like much of the world’s economies, Swiss inflation is being driven by high energy and food prices, but since the Swiss National Bank is far more patient than central banks like the ECB, don’t count on threats of a rate increase anytime soon.

British Pound Remains Weak – Will the Downtrend Target 1.97?

While the British pound traded primarily on the whims of the greenback, the release of UK housing data did little to boost the currency as Nationwide home prices plunged 8.1 percent in July from a year earlier. This was the sharpest decline since at least 1991, adding to the already-abundant list of downside risks for the UK economy. On Friday, the PMI results for the UK manufacturing sector may do the same, as the index is anticipated to slip further below 50, signaling contraction for the third consecutive month.

Comm Dollars Remain Weak As Aussie, NZ Economies Falter

The Australian, New Zealand and Canadian dollars remained weak on Thursday as data from all of the regions were abysmal. In Australia, retail sales unexpectedly slumped 1 percent in the month of June and 0.6 percent in Q2, which was actually the worst reading since Q3 2000. In New Zealand, business confidence fell for the first time in four months in July to -43.2 from -38.7, giving the RBNZ even more reason to consider cutting rates again this year after reducing the official cash rate last week to 8.00 percent. In Canada, GDP surprisingly slipped 0.1 percent in May due primarily to a slowing in natural gas and crude oil production. Overall, the Australian, New Zealand, and Canadian dollars could be in trouble in coming months, as many of these regions depend on export demand for growth and a global economic slowdown threatens to lead demand for commodities to drop.

Kathy Lien is the Chief Currency Strategist at FXCM.