EUR/USD smacks higher as Q1 GDP data disappoint; Fed rate decision next
- The EUR/USD pair rose after the US released disappointing Q1 GDP data.
- Data from the Bureau of Economic Analysis showed that the economy contracted by 4.8% vs 4.0% (expected).
- The bureau warned that the data did not reflect the full extent of the coronavirus pandemic.
The EUR/USD pair rose after the Bureau of Economic Analysis (BEA) released weak US Q1 GDP data. The market is now waiting for the Fed interest rate decision, which will be released later today.
US Q1 GDP data disappoint
Preliminary data from the BEA showed that the US economy slumped by 4.8% in the first quarter. This growth was worse than what most analysts polled by Refinitiv were expecting. Analysts at Wells Fargo were expecting the economy to slump by 1.6% while those at Goldman Sachs was expecting a decline of 4.8%. A GS analyst told Fortune:
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“While we expect the reported decline to be large, we believe economic reality during the quarter was even worse, with a first-print bias of 3-4pp concealing a ‘true’ GDP decline closer to -8¼% (and a consumption decline of -7%).”
The economic slump ended the longest recovery in US history. This rally started following the past financial crisis, which was caused by a crash of the housing market.
According to the BEA, the slump was mostly because of the lockdown that states instituted in the quarter. This lockdown led to a 7.6% decline in personal consumer spending (PCE). At the same time, personal savings increased from the previous $1.27 trillion to $1.60 trillion. The bureau said:
“The decline in first quarter GDP was, in part, due to the response to the spread of COVID-19, as governments issued “stay-at-home” orders in March. This led to rapid changes in demand, as businesses and schools switched to remote work or cancelled operations, and consumers cancelled, restricted, or redirected their spending. “
Recent Q1 data point to a worse Q2
While the first quarter numbers were bad, recent data suggests that the second quarter will be worse. For example, more than 26 millionAmericans have filed for unemployment benefits in the past five months. This is according to data from the Labour Department.
Another report released earlier this month showed that the unemployment rate creeped back to 4.4% from a 50-year low. While this was a bad number, analysts expect that the April rate will jump to more than 14% when the data is released next Friday.
Meanwhile, air travel has stopped in the US and the hospitality industry has been decimated. This is an important metric because the travel and hospitality industry employ millions of Americans. Early this month, data from Markit showed that services PMI slumped to 27.0.
The industrial production has declined to a 46-year low while a recent data from Markit showed that manufacturing activity dropped to a historic low of 36.9. Meanwhile, retail sales dropped by 8.5% in March. These numbers will be worse for April since most people stayed at home through the month. Additionally, the housing market has been showing cracks as new and existing home sales numbers fall.
Therefore, most analysts expect that the US GDP will slide by more than 10% in the second quarter. Analysts at Goldman Sachs expect the economy will contract by 34% while those at JP Morgan expect it to fall by 25% in the quarter. Those at Morgan Stanley expect a 38% decline in the US GDP.
EUR/USD falls ahead of Fed interest rates decision
The market is now waiting for the interest rates decision by the Federal Reserve. According to Bloomberg, most analysts expect the bank to leave rates unchanged. They also expect the Fed to say that it stands ready to intervene in order to stabilise the market.
Analysts will want to hear several things from the Fed. First, they will want to hear the comments about the balance sheet. As shown below, the bank has expanded its balance sheet at the fastest rate in history. As such, the Fed could talk about tapering of its balance sheet.
Second, they will want to get information about how long the Fed intends to leave interest rates this low. According to Bloomberg, some former Fed members have said the bank should commit to leave rates unchanged until the unemployment rate slides to 4% and inflation reaches 2.5%.
Finally, analysts will be eager to hear whether the bank plans to tweak its credit plans. This is an important aspect because the Fed has announced a number of measures to support the economy. For example, it has launched a $1.1 trillion facility to support the commercial paper market. It has also moved to buy junk bonds worth almost $500 billion. Therefore, analysts will want to hear about what the bank is planning on these.
EUR/USD technical outlook
On the three-hour chart, the EUR/USD pair seems to be struggling to find direction ahead of the FOMC rates decision. The pair is trading slightly above the 50-day and 100-day exponential moving averages and between the 50% Fibonacci retracement level. I expect the pair to see more volatility today ahead and after the Fed interest rate decision. As such, the key points to watch will be the 61.8% and 23.6% retracement level at 1.0980 and 1.0790 respectively.