Weekly Market Review 27/04 – 03/05/2015

Dollar Correction Coming?

Although it’s fairly unusual, every now and then the US GDP release and the Federal Reserve Bank rate decision occur on the same day. This coming Wednesday is just such a day. Of course, both the GDP release and the rate decision will be highly watched events that will dominate markets across the board, from FX to indices to commodities, with the good old US Dollar at the center of it all. Many investors wonder, then, whether this Wednesday could point to a Dollar correction. While Wednesday might, indeed, be the day upon which the stage will be set for a Dollar correction it might also be the day that will dispel investors’ fears of US economic weakness. Under the former scenario we could see the expected Dollar selloff while under the latter the Dollar could end up firmer and with stronger momentum. Which scenario will it be is the critical question, followed by why are the stakes so high?

A Big GDP Number

To put things in perspective, Wednesday’s release of GDP is not just any old GDP release but the first GDP release for Q1 of 2015. In other words, these will be the first growth figures coming from the US in 2015. What will they be? Dollar bulls are hoping for a reading north of 2% to remain somewhat optimistic while a number north of 2.5% would allow them to feel strongly confident about further Dollar gains in the near future. On the other hand, the market pessimists, aka the bears, are eyeing the latest weakness in retail sales and durable goods as well as the weakness in oil and they are betting on a miss, i.e. a reading below 2%. If this is, indeed, the case then all those who feared a soft patch in the US economy will have been proven right and this means a rate hike in June is almost certainly out of the question (September, too, would likely be up for debate), and as a result, the Dollar could quickly turn south.

Rate Decision for Dessert

Of course, to complete the Dollar picture investors will consider the second high profile event of the day and that is the FOMC rate decision. The rate is almost certainly expected to remain unchanged and though Fed Chair Janet Yellen won’t be holding her customary press conference afterward, investors will still want to scrutinize the Fed’s written statement. Is the economy still on a strong footing? Is inflation still moving back to 2%, the Fed’s “precondition” for a rate hike? If growth figures will be mild to slightly weak yet the Fed remains confident in its statement, investors might assume that the Fed expects a rebound in growth for the second quarter. But if the Fed statement is decidedly cautious then investors could speculate that a June rate hike is off the table, especially if the growth figures released earlier in the day are disappointing.

Big in Japan?

While this week will be dominated by data from the US and its effect on the Dollar, one cannot overestimate the importance of this month’s BOJ rate decision (which is due out on Thursday) and its effect on the Yen. The Japanese economy continues to be straddling a thin line between recovery and recession thus Yen traders ponder the chances for more BOJ stimulus. With the BOJ rate decision and the speech from BOJ Governor Kuroda to follow, there is a chance that the BOJ Governor will use that stage to announce more action or else to prepare markets for more action. If, indeed, this speculation proves correct, reaction on the JPY will not be too late to come with most Yen pairs, e.g. the USD/JPY, the AUD/JPY and GBP/JPY, switching gears to a bullish bias (lower Yen).

Down to Business

With highly volatile high profile data due out on Wednesday, the week will probably trade in two distinct phases. The anticipation for US data until the GDP and interest rate decision could mean range bound trading until then, while the so-called big swings in the Dollar, commodities and US indices will wait until after Wednesday’s releases. If US growth is a miss and the Fed is more cautious, then trade is expected to be on a weaker Dollar, stronger commodities and neutral indices. If the Fed is upbeat and US growth is still fair (say above 2%) then the Dollar could advance once again, curbing bets on commodities while US indices could still maintain a bullish momentum.

On the Plate

US PMIs (Monday) – The Markit Services PMI and Markit PMI Composite will provide a glimpse on US economic performance as a perpetration for Wednesday’s GDP.

UK Q1 GDP (Tuesday) – The first release of UK growth figures for Q1 2015 will be highly watched both by FTSE100 and Sterling traders alike. If UK growth accelerates at or above 3% it could support a major Sterling rebound.

US Consumer Confidence (Tuesday) – Consumer confidence this week will mostly affect Wall Street and more specially indices. If consumers are even more confident than before the S&P500, the Dow and the Nasdaq100 could gain.

US Q1 GDP Annualized (Wednesday) – One of the two main events of the week. If US growth is above 2% it could support the dollar. However If US growth hits 2.5% or above, then the dollar bullish momentum could return quickly. Anything else could spell dollar weakness.

FOMC Rate Decision (Wednesday) – If the Fed statement shows the Fed has turned less upbeat it could undermine the dollar. Anything else would be dollar positive.

BoJ Rate Decision (Thursday) – Investors believe there is a high likelihood of more BoJ easing. If this will be the case the Yen could quickly turn bearish.

Eurozone CPI (Thursday) – If Eurozone Core CPI moves higher than 0.6% it could benefit the Euro.

ISM Manufacturing (Friday) –Will shed light on the performance of the US manufacturing sector. A rise above 51.5 would mostly benefit Wall Street.

Chart of the Week – GBPJPY


Economic Calendar:

Real Time Economic Calendar provided by Investing.com.