Tomorrow’s GDP Figure May Cause Next Major Move In FX Market

Written by ForexTraders.com on July 29, 2010 at 9:50 AM ET

United States

The U.S. Beige Book report came out Wednesday, and it served to further support Fed Chairman Ben Bernanke's view that the economy is hitting a period of significant slowdown.  It is still difficult to gauge how bad the slowdown will be, but it is apparent now that the economy is slowing considerably.  The beige book revealed that credit is tight and demand is weak.  This is not a good combination for further economic growth.

Core Durable Goods also came out of the U.S. much worse than expected at -0.6% versus the expected number of 0.6%.  This contraction in durable goods orders further supports the notion that the manufacturing sector is taking a big hit, which is another shot against the current U.S. recovery.

All eyes are now set on the Advanced GDP reading that will come out Friday morning.  This number is extremely important as it will give market participants a very clear indicator of how much the economy is slowing.  The expected number is 2.5%

A severe slowdown in the U.S. economy could be either good or bad for the U.S. Dollar.  It really depends on how the rest of the global economy performs.  If performance in the Eurozone continues to go well, then a slowdown in the U.S. economy could cause investors to rush out of the U.S. Dollar and into the Euro.  However, if the rest of the global economy slows down significantly as well, then investors will most likely make a flight-to-quality run, which would push the U.S. Dollar up against most major currencies.  Let's take a look at the current U.S. Dollar Index.
 
As you can see in the chart above, the U.S. Dollar is finding support at current levels.  It has been in quite a decline since early June when the Eurozone Debt Crisis fears began to wane as the ECB put bailout funds in place for struggling Eurozone countries.  The fall in June and July is due for a bit of a correction, but if the Dollar does move below current levels, we could see a prolonged movement to the downside with only minimal breaks as investors take profit and reassess the global situation.

Euro

The Euro is currently breaking to multi-month HI's that it has not seen since April.  The Euro is heading into very strong resistance at the 1.3115 area, which is the 38% retracement of the overall move in the Euro from November 2009 to the June 2010 low.  A clear break above 1.3115 would be an extremely bullish sign for the Euro, and it could happen.  Investors are loving the Euro right now.  European equity markets are performing well, employment reports out of Germany were very good yesterday, and the austerity measures introduced by many European countries, at the moment, seem to be working.  If the austerity measures in Europe do actually work, and don't cause a massive economic slowdown as most Keynesians fear, then the Euro should gain significantly versus the U.S. Dollar.  It is still too early to tell for sure.  Most economists expect struggling EuroZone countries to enter a time of struggle again in the middle of 2011, so we have some time before we will know for sure how well the austerity measures are working.

Pound

The British Pound has taken a hit across the board after Governor Mervyn King's very dovish comments yesterday.  In a prepared statement, King said that the U.K. has a "considerable" way to go before policymakers return interest rates to normal levels.  This, of course, is very bearish for the Pound because investors want to see an interest rate hike.  David Miles, who is also on the Bank of England committee said that the central bank may have to step up its bond-purchasing program.  "Recent events in sovereign debt markets and in bank funding highlight the downside risks.  Further asset purchases may be warranted at some point in the future."  This rhetoric out of the BOE is making it clear they have no plans to hike rates anytime soon, and they are even considering further quantitative easing measures.  This puts the BOE in the same camp as the Federal Reserve concerning a future rate hike.  It's not coming anytime soon.  This outlook from the BOE will weigh heavily on the Pound versus the Euro, and the EUR/GBP should find strong demand in the near term.

New Zeland

The Reserve Bank of New Zeland did raise rates on Wednesday night, but the Kiwi fell sharply after the announcement due to very dovish remarks out of the Central Bank.  Governor Allan Bollard's statement noted, "the pace and extent of further official rate increases is likely to be more moderate than projected in the June statement."  The market did not want to hear this, although it was somewhat expected.  After a very poor business confidence reading from New Zeland and a very low CPI number out of Australia on Tuesday, the market was convinced that Australia would not be raising rates in August, which meant that New Zeland would probably slow its pace of interest rate hikes as well.  And sure enough, that is exactly what the Central Bank stated on Wednesday.  There will most likely be more hikes this year, but they will happen at a slower and more moderate pace.  Let's take a look at the price action on the New Zeland Dollar directly after the rate announcement.
 
The New Zeland Dollar recovered all of its losses during the London trading session Thursday morning, and it is currently sitting just below resistance at 0.7280.  It has made a standard two day correction in a larger bull move, so we could see higher prices on the Kiwi in the next few days.  Initial resistance is in the 0.7400 area.