August 3rd 2009, GDP Interpretations Vary

The USD lost a large slice of ground to the GBP and EUR as investors took Wall Street up on what was received as a �good� Advance GDP outcome on Friday. However, the GDP data that was published upon closer inspection will have to be considered long and hard. The Advance GDP figure for the second quarter produced a number of minus -1.0%, better than the estimate of minus -1.4%. Yet, a telltale sign that seems to have gone unnoticed by many was that the GDP for the first quarter was revised downward to a terrible minus -6.4%. Thus what we saw were equities somehow maintain their July rally on the last day of the trading month and go into the weekend perhaps impressed by its results, which no doubt helped spur on risk appetite within the currencies. Today the ISM Manufacturing PMI reading is on schedule and it carries and estimated reading of 46.4. Tomorrow the Pending Home Sales data will be published.
A curious dynamic is building within the markets, we are seeing a significant rally in equities and sustained on speculation that a recovery is in sight. However, there remain analysts who are questioning the way in which the economic data is �being sold� and are warning about the possibility of anemic growth prospects for the U.S. economy. Unemployment remains a huge concern and at the end of this week the Non Farm Employment Change numbers will be presented. The GDP in the U.S. is largely made up of consumer spending and as long as the American public is not spending at their prolific levels from the past, strong growth remains suspicious. If not for the extraordinary amount of money the U.S. government pumped into the economy the past quarter, one has to wonder what the actual GDP would have been. The Obama administration presented a united front speaking about the positives in the economic data this weekend, but it must be asked if all of this is a bit too premature. The USD continues to roil under the specter of a sustained rally and traders who are looking for a pullback await, but may be playing with fire in the short term.
The EUR kept climbing against the USD on Friday as traders continued to show signs of increased risk appetite. The European Union issued their broad Flash CPI figures and it produced a poor number of minus -0.6% compared to the estimate of minus -0.4%. The data highlights the rather unwelcome news that deflation rather than inflation continues to be a characteristic of this economic downturn. Today the Retail Sales figures from Germany will be published and the forecast is calling for a gain of 0.4%. Also the Final Manufacturing PMI numbers will be presented for the European Union. Tomorrow will be a relatively light day of data with only the PPI numbers due. The EUR has had a good performance, mirroring the rise in the equities markets of July. The question for the EUR may be how the equity markets internationally will perform in August.
The U.K. did not release any major economic data on Friday but that did not stop the Sterling from increasing its value against the USD. The rally across the FTSE and other international equity markets continued to bolster the performance of the GBP. Today the U.K. will publish its Manufacturing PMI survey and the expected reading is 47.7, which would be a slight improvement over the previous report. The Halifax HPI was on schedule but has been pushed back until Tuesday tentatively. Also the Construction PMI figures will be presented on Tuesday. The state of the U.K. economy like its counterparts remains mired in a strong recession, but the Sterling has fostered a consistent upward trend the past five months. The fact that the equity markets have provided an impetus too, has presented GBP traders with plenty of opportunities.
The JPY picked up some ground against the USD on Friday as trading in the currency pair continued to present traders with a rather tight range. The Japanese economy has been beset by deflation and although the Bank of Japan says it sees stability entering the economy, some investors are likely to be rather skeptical of this. Gold is trading near the 952.00 USD mark and continues to show that it is trading in an inverse pattern compared to the greenback. As for the JPY, it has shown once again that its trading range with the greenback is challenging.

Written by: Robert Petrucci
Bforex Chief Commodity Expert and Forex Analyst