Dollar Higher But Sensitive to Growth of US Economy in Q1

US GDP could point to a slowdown in the pace of growth

The US dollar is higher against most majors after the European Central Bank (ECB) decided to keep rates and monetary policy unchanged despite improving economic. The Bank of Japan (BOJ) also kept monetary policy in check and did not update its inflation expectations and like his counterpart at the ECB, Governor Kuroda was optimistic about the economy but maintained the status quo. The announcement on Wednesday of a tax plan reform outline in the US failed to spark a dollar rally, but with two major central banks standing pat only the pound was able to gain against the greenback from the majors.

Economic releases in the US were disappointing on Thursday. Core durable good orders in the US fell by 0.2 percent, short of the 0.4 percent gain that was forecasted. Unemployment claims rose by more than expected last week to reach 257,000. Pending home sales in the United States dropped 0.8 percent after rising 5.5 percent in February. Housing and unemployment have posted strong gains so there is little call for concern, but the small gain in durable goods, specially the unexpected drop core reading that removes transportation items will raise concerns about the pace of recovery in the US economy.

The Bureau of Economic Analysis (BEA) will release the first estimate of the gross domestic growth (GDP) for the US economy in the first quarter on Friday, April 28 at 8:30 am EDT. There are multiple signs that the US economy is slowing down with an estimate of 1.3 percent well below the 2.1 percent of the last quarter of 2016. This release will be the first of three, but being the earliest will shape the expectations for the following GDP Q1 updates.The Atlanta Fed published its forecast for the US economic growth showed an unimpressive 0.2 percent annualized gain for the first quarter of 2017. The model used by the Fed differ from what the Bureau of Economic Analysis will release on Friday.

The EUR/USD lost 0.13 percent in the last 24 hours. The single currency is trading at 1.0881 after the European Central Bank (ECB) held its rate and quantitive stimulus program unchanged. The EUR was higher as ECB President Mario Draghi started his press conference praising the euro zone’s recovery and reduced risks. During the Q&A it became apparent that the door on more accommodative policies remained open. The market was expecting a more hawkish rhetoric from Draghi, specially after the first round of the French elections reduced risks on the rise of populism that could break up the union. German policymakers have pushed for an end to stimulus but despite the signs of a more solid economy, the ECB is not ready to commit.

The USD/MXN lost 0.888 percent on Thursday. The pair is trading at 19.0211 after the Trump administration said it will the NAFTA treaty a good strong shot, before pulling the plug completely. This is a reversal from Wednesday’s rumblings of an executive order being drafter to terminate the US involvement in the deal. Trump says he reached that decision after calls with the Mexican president and the Canadian prime minister. The peso gained after the plans to renegotiate NAFTA replaced the idea of tearing it down outright. There is still the legal question if Trump could unilaterally end the deal, as it was implemented through legislation. The fact that the trade agreement has winners and losers in all three nations means that it could prove unpopular in some US states who could lose direct investment.

Market events to watch this week:

Friday, April 28
4:30am GBP Prelim GDP q/q
8:30am CAD GDP m/m
8:30am USD Advance GDP q/q

*All times EDT
For a complete list of scheduled events in the forex market visit the MarketPulse Economic Calendar

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He has been published by The MarketWatch, Reuters, the Wall Street Journal and The Globe and Mail, and he also appears regularly as a guest commentator on networks including Bloomberg and BNN. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza