The second reading for 4Q U.S. GDP is expected to be revised lower by 1.6% to -5.4% as the credit freeze choked the economy. Indeed, we saw durable goods orders for December revised lower to -4.6% from -3.0% which should drag the quarterly reading in the initial GDP print down from -7.3%.
[B]Fundamental Outlook[/B]
The second reading for 4Q U.S. GDP is expected to be revised lower by 1.6% to -5.4% as the credit freeze choked the economy. Indeed, we saw durable goods orders for December revised lower to -4.6% from -3.0% which should drag the quarterly reading in the initial GDP print down from -7.3%. This could lead the personal consumption component to decline more than the -3.7% that is forecasted by economists. A deeper contraction in the fourth quarter will weigh in expectations for future growth and could increase expectations for more job losses. Last week saw initial jobless claims rise by 667,000 and next week’s unemployment reading is already expected to rise to 7.9%. A sharp drop in growth could be the fundamental indicator that impacts the dollar in a traditional manner leading it to trade lower. Although, risk aversion has been prone to fuel bullish dollar sentiment, a deep contraction in the economy could break the correlation as it did with the Yen when the Japanese economy reported a 12.7% drop in GDP. Therefore, the weak growth numbers could support the bearish dollar technical outlook.
[B]Technical Outlook[/B]
The break from the triangle and decline to 1.25 is viewed as wave 5 within the 5 wave decline from 1.47. A corrective advance over the next month (at least) is expected. Initial resistance is not until 1.33 (former chart resistance and 38.2% of decline from 1.4723). There is risk of a drop below 1.2660 before the larger rally. In this instance, there would be a high reward/risk long opportunity. Even at current price, the ratio is skewed in favor of bulls.
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[I]To discuss this report contact John Rivera, Currency Analyst: [email protected][/I]