The three most important event risks on this week’s calendar are FOMC, U.S. first quarter GDP and Eurozone first quarter GDP. On Wednesday, we learned that while the Federal Reserve is optimistic, it still wants to see more improvements in the economy before setting the stage for tapering. Today, U.S. first quarter GDP growth beat expectations with the economy growing 6.4% between January and March, up 4.3% from the previous quarter. In response, investors bid the U.S. dollar higher against the euro and the Japanese Yen, but the greenback’s performance versus other currencies was mixed. This tells us that the enthusiasm from today’s report was limited, which is not surprising given the backward looking nature of GDP.
On Friday, the Eurozone releases its first quarter GDP report, and another technical recession is expected. Unlike the U.S., which enjoyed three straight quarters of positive growth, Eurozone GDP is expected to fall for the second quarter in a row. The prospect of a double-dip recession would normally be worrisome, but traders will most likely look past this decline, as more recent reports show underlying strength and an accelerating recovery in the Eurozone. In fact, Eurozone sentiment surged in April, according to the latest economic and industrial sentiment indices. EUR/USD traded lower on Thursday but the decline was modest, which reinforces our view that investors will look past weakness in Friday’s GDP report.
Sterling, on the other hand, traded higher against the greenback for the fifth day in a row. No news was probably good news for the UK this week, as the pair quietly trended upwards. The 1.40 mark will be an important resistance level that is unlikely to break before the weekend. Next week will be an important one for GBP/USD, with a Bank of England monetary policy announcement and the U.S. non-farm payrolls report scheduled for release.
USD/CAD fell to a fresh three-year low on the back of higher oil prices and stronger average weekly earnings. The Bank of Canada ignited a fire underneath the Canadian dollar when it reduced asset purchases and brought forward its forecast for tightening this month. Monthly GDP numbers are due for release on Friday and, with retail sales rising strongly last month, good numbers are anticipated. Until there’s a catalyst to swing the loonie the other way, the downtrend in USD/CAD should remain intact.
The New Zealand and Australian dollars did not participate in the rally, as both currencies traded lower versus the greenback. New Zealand’s trade surplus shrank in the month of March as exports and imports increased. Australia’s import and export prices rose in the first quarter, but the currency appears to still feel the sting of yesterday’s softer CPI. Tonight’s Chinese PMI report should have a more significant impact on the comm dollars than Australian PPI.