Will The Dollar Finally Turn On US GDP?

GDP Annualized (YoY) (1Q A) (12:30GMT)
Personal Consumption (YoY) (1Q A) (12:30GMT)
Expected: 1.8%
Expected: 3.5%
Previous: 2.5%
Previous: 4.2%

How Will The Markets React?
Not long ago, Forex traders were disappointed when UK released a first quarter gross domestic product number that was largely in line with expectations. Though the lofty rate of growth in the United Kingdom was good on a fundamental basis, traders were more interested in the rush of an unexpected print to fuel short-term breakouts. The same sentiment is likely surrounding the US GDP report due Friday morning. For confirmation that something unusual is brewing in the markets we need only to look back at this past week’s economic calendar and the lack of a reaction from the dollar. Tuesday’s data flow brought the biggest drop in existing home sales in 18 years while Wednesday’s docket printed a better than expected durable goods report. Despite these numbers though, the dollar hardly broke its steady pace. To ignore top tier indicators so blatantly like that, there clearly has to be something looming over the market. Looking ahead to tomorrow’s GDP report, economists have put in an official consensus of a 1.8 percent annual pace. This would be the slowest rate of growth in over four years and put a very large crimp in growth projections for the world’s largest economy. While the official forecast is already a depressed estimate, the trading masses may actually be holding out for an even lower number. Since so many indicators have crossed the wires with disappointing numbers over the past few weeks, there is a tangible air of pessimism. Therefore, should the GDP come in modestly below the official consensus, the greenback and treasuries may be somewhat insulated. At the same time, should it more or less hit its mark, the heavy handed bears may let up. While there are high expectations of a short-term reaction to the key indicator, it effects could easily carry through in the weeks ahead. In fact, the growth report could have considerable implications for next Friday’s NFPs if consumer spending failed to prop up growth in the first quarter.
Bonds - US 10-Year Treasury Note Futures

Treasuries, like the dollar, have pulled away from major support and resistance levels to give traders considerable running room in the event of a big surprise in Friday’s growth report. In the past two sessions, yields have rallied on the momentum supplied by better-than-expected durable goods orders and the diversion of record highs in the equities market. However, Friday’s direction is up in the air. If predictions for GDP are met or fall short, the deceleration in the economy would certainly call up a Treasury rally that could eventually (or quickly) take the benchmark 10-year note futures contract to 109-10 resistance. On the other hand, since predictions for Friday are running so low, it wouldn’t take much of a positive turn to rally optimism and yields in turn. One thing is certain - event risk is high!

Has the Euro hit a top? We may find out soon enough on the release of US GDP on Friday. The figure is estimated to show a major slowdown in expansion to 1.8 percent from 2.5 percent. However, it’s possible that forecasts are underestimating the figure, creating the potential for a surprisingly strong release. Furthermore, the markets have been inundated with gloom and doom stories about the US economy and the US dollar, so even if GDP is slightly lower than 1.8 percent, traders may still turn bullish on the greenback and take EURUSD down towards support. On the other hand, if GDP hits the tape significantly lower than expected, markets may consider the possibility that the economy is headed for a hard landing and propel EURUSD through resistance at 1.3665 to brand highs.

Equities - S&P 500 Index
US equities were mixed today, showing little inclination to make any big moves ahead of GDP on Friday morning. The Dow Jones Industrial Average, which broke through the 13,000-points threshold for the first time on Wednesday, edged up 0.1 percent to close at 13,105.50 while the S&P 500 index slipped 0.1 percent to 1,494.25.
Shares in Apple rose 3.7 percent to $98.84 after profits easily beat estimates, mostly because of strong Macintosh computer sales. Meanwhile, Amazon shares jumped a further 10.5 percent to $62.71 following Wednesday’s 27 percent gain on the back of strong earnings. However, the release of US GDP could be the deciding factor of where shares go Friday. While the figure is expected to show that expansion slowed to 1.8 percent in the first quarter, it’s possible that the estimates are low balling the figure, creating the potential for a surprisingly strong release. As a result, the S&P 500 Index could surge back up through the recent highs of 1,498.02. However, if GDP proves to disappoint the markets and show the US economy heading towards a hard landing, equities could plummet.