In yesterday's report we discussed the importance of today's GDP figure, and the market did not let us down.  To briefly recap, we were looking for 1 of 3 specific outcomes as a result of the GDP announcement.

• If GDP came out as expected the dollar would most likely drift slightly higher.
• If GDP came out better than expected, the dollar would most likely aggressively move higher.
• If GDP came out worse than expected, the dollar would most likely aggressively fall.

Today's figure came out less than expected at 2.0%, and the dollar immediately began to sell-off.  Although 2.0% is better than last quarter's 1.7% final reading, it is still a depressing sign that the United States economy is facing serious challenges, and it further supports the notion that the Federal Reserve will, indeed, move forward next Wednesday with another round of Quantitative Easing.

U.S. Dollar Index

 
You can see in the chart above that the market immediately sold U.S. dollars as soon as GDP was released.  The dollar fell against every major currency pair as investors realized that further QE measures were most likely going to happen.  Dollar-selling pressure did stabilize about 30 minutes before the release, but as of late-morning New York, the selling pressure is beginning to pick up again as the euro, pound, and aussie are all breaking significant resistance levels against the dollar.

Risk Aversion Data Flows

The last 12 hours have seen several reports from around the world that are highlighting the severity of the slowdown in the global economic recovery.  First of all, during the overnight session, Asian factory output figures came in very poorly.  In Japan factory output fell for the 4th consecutive month as Prelim Industrial Production came in at -1.9% versus the expected -0.5%, and in South Korea, factory output fell for the 2nd consecutive month.  Asia has been regarded as the engine of economic growth during the global recession of the last two years, and a slow-down in Asia could have disastrous effects on an already-feeble recovery in the West.  Risk aversion led to a sell-off in Asian equity markets and unchanged markets in Europe as investors seem to be unwilling to build further risky positions before next week's QE announcement from the Fed.

The Fed's QE announcement next week is far from the only major risk event, however.  In fact, next week is packed with major risk events, which could cause very strong volatility to unfold in the foreign exchange market.  Major key risk events are as follows:
 
Monday 
11:30 pm Reserve Bank of Australia Rate Announcement      

Wednesday
2:15 pm  Federal Reserve Rate Announcement & FOMC Statement      

Thursday   
8:00 am  Bank of England Rate Announcement
8:45 am  European Central Bank Rate Announcement
9:30 am  ECB Press Conference
      
Friday
8:30 am  Non-Farm Payrolls     

Suffice to say, next week is very heavy in economic data releases.  In any given week, each of these pieces of economic data is enough to violently move the market, and since they are all coming out next week, we could see a new trend develop in the forex market by week's end.  The currency to watch is the U.S. dollar.  The dollar will most likely either begin to strengthen or weaken significantly by the end of next week.  From a technical perspective, there are a few levels to watch in order to understand which direction the dollar is headed.
 
The U.S. dollar index is basically in a zone of consolidation down at its lows on the Daily Chart.  In the chart above, you can see that it is currently trading right in the middle of overhead resistance at 78.36 and downside support at 76.14.  Next week, the dollar will most likely breach one of these levels and begin trading outside of the range.  Look for a strong Daily close above 78.36 for further bullish movement or below 76.14 for further bearish movement.  As we have stated in previous analysis this week, if the dollar does break overhead resistance at 78.36, it will meet very strong resistance at the 80.00 level.

EuroZone Employment Woes

The EuroZone Debt Crisis that nearly destroyed the EuroZone during the Spring of 2010 served as a wake-up call to ECB policymakers and member countries.  Basically, it became evident that countries could not recklessly spend money without regard for proper budgetary management and expect for nothing bad to ever happen! 

As a direct result of the Crisis, European Central Bank President Jean-Claude Trichet and the rest of his team at the ECB have demanded EuroZone countries to implement very strict austerity measures in order to reign in public spending and slash government deficits.  These austerity measures have been regarded as essential by Trichet and his team, not only to bring out-of-control spending into order, but also to restore investor confidence.

When Trichet made the decision to move forward with various austerity measures throughout the EuroZone, many economists and analysts criticized the move, saying that if austerity measures are forced upon a country when it is in a very fragile economic state, that the measures could serve to worsen economic conditions instead of improve them.  For the past several months, however, the EuroZone has been moving forward, albeit at a very slow pace.  Today EuroZone employment figures were released and the jobless total rose to 10.1%, which is the highest level of unemployment since the creation of the euro in 1999.  The dire labor market in Europe is regional, though. 

There are some countries, such as the Netherlands (only 4.2%) that have very strong labor markets, but then there are countries such as Spain (whopping 20%) that have out-of-control unemployment.  The euro still managed to rally today on the heels of the GDP figure in the United States, however, and the euro could rise even further.  The fact that the EuroZone is sticking to its plan of strict austerity measures while the United States is about to initiate QE2, further widens the spread between when each Central Bank will emerge from accommodative monetary policy, which, of course, puts further pressure on the dollar.