The United States economy encountered annualised growth of 1.1% between January and March, which represented expansion of nearly half the 2% reading expected. The USD has been able to ignore this – for now.
There are a couple of explanations as to why the USD could be viewed as unexpectedly stronger despite a significant GDP miss. While the data on headline achieved anything but limiting prolonged concerns around a recession, the Greenback is the ultimate asset of safety for investors. The data miss could have encouraged some buying support as a result. Digging deeper into the GDP numbers, consumer spending still managed to perform relatively well. This would have been digested as such by Fed policy officials.
Consumer spending accounts for a critical chunk of United States economic activity. Its ability to remain robust despite the difficult global environment does not alter Federal Reserve interest rate expectations. What investors will be looking at moving forward is whether upcoming data begins to draw a picture that the drastically higher US interest rate environment is impacting consumer spending in a meaningful way. This in collaboration with data reports on the employment sector entering a downturn will be seen as clear indicators that Fed officials will need to turn more dovish.
A more downbeat US interest rate narrative is also likely required by the market to resume softness in the US Dollar.
As long as the Fed does carry the course of leading the market to believe that interest rate cuts are on the cards for 2024 and we do not have a sudden resurgence in geopolitical risks, I still expect the Greenback to resume its gradual trend of weakness over the medium-term. Weakness in the Dollar is required for expected projections such as EURUSD above 1.10 and Gold above $2000 to be maintained. Gold has clearly struggled to jump above the $2000 hurdle and has suffered rejections close to the psychological level, encouraging a pullback in price action.
EURUSD buyers should also be aware that we would likely require a close above 1.10 for weekly trading today to carry improved confidence that the Eurodollar can resume its incline in May. Until we get to this point, rejections around the 1.10 handle is likely going to encourage pullbacks in price action over the near-term.
One asset that is particularly sensitive to global economic slowdown fears is Oil and its negative price action throughout trading this week has not been shy of expressing this sensitivity.
After appearing like WTI Oil would make a run for a stay at $79 at the beginning of the week, the commodity has since dipped just over $4 to trade as low as $74. Oil is hoping to stabilise around the $75 as the final day of trading for April concludes today. This would still represent a decline of around 2.5% for the week.
Stocks again lifted by tech performance
Continuous headlines over concerns in the banking sector were at least ignored by markets temporarily on Thursday as Wall Street enjoyed its best day since January.
Amazon was the latest company giant from the tech sector to report better than expected sales and profits, repeating a similar narrative that the tech sector is managing to somewhat withstand the challenging global economic environment as has been previously suggested by the updates from Microsoft, Google and Meta platforms across recent days.
If somewhat perplexed regarding how investors are comfortable to ignore themes such as banking stress into global markets (even if just temporarily) it is important to remember that the tech giants contribute to a large chunk of market valuation in the stock market. As such, when the big players announce their earnings updates and the announcements come in somewhat above expectations, it allows some reprieve from other global macrofinancial themes.
Week ahead will be all about the Fed and NFP
Despite most of Europe welcoming a bank holiday on Monday next week, the upcoming week is still going to be a heavy one in terms of economic data releases.
The main attention will be on the United States with the Federal Reserve interest rate decision and monthly employment report both scheduled. However, other economic releases including Manufacturing PMIs, Factory Orders and Balance of Trade will each also provide key insight in regard to economic momentum for the largest economy in the world.
Of course, it will be the upcoming Federal Reserve interest rate decision that acts as the main event for traders. The United States central bank is widely expected to increase interest rates once again. Confirmation of this would indeed lift US rates to the highest level seen since the global financial crisis of just over 15 years ago.
With the upcoming interest rate increase already unanimously expected as well as priced into the market, what investors will most want to know from the Fed is how the interest rate path looks for the remainder of 2023.
We are likely to get more commentary from Fed officials that future moves in monetary policy will be dependent on data. This is why the monthly employment report from the United States is a cannot miss for investors. Even though there has been a juggling of market expectations that the previous train of thought that the Fed might lean towards cutting interest rates this year as premature, if the monthly employment report spells out that the drastically higher interest rate environment is weighing on the jobs sector, there could be a reverse swing towards the stance of repricing into the market a dovish Fed stance before 2023 concludes.