US Dollar strengthens after solid Q4 GDP numbers

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1 March 2019


The US Dollar recovered against its major peers yesterday, jumping by almost half a percent against the Euro and rallying to a 10-week high versus the Yen, after data showed that the US economy continued to grow at a solid pace at the end of 2018.

reliminary growth numbers for the fourth quarter of last year, delayed due to the longest running shutdown in US government history, came in better than economists had anticipated. On an annulaised basis, the economy expanded by 2.6%, somewhat faster than the 2.3% priced in. While marking a slowdown on earlier in the year, this is still a very healthy level and a pace much faster than much of the developed world – particularly the Eurozone.

A lot has been made in the media of the recent narrowing bond yield spread between the US 10-year and 2-year yields. This indicator, when it turns negative (i.e. the yield curve inverts) has historically been followed by a recession in the world’s largest economy – as was witnessed prior to the financial crisis in 2008 and the early-2000s recession. While this is now close to being the case (Figure 1), we do not, however, believe that a recession is on the cards just yet in the US.

Figure 1: US 10Y & 2Y Government Bond Yield Spread (2000 – 2018)

Firstly, the process of quantitative easing, implemented by the Fed between 2008 to 2015, has artificially deflated yields. Moreover, this narrowing of spreads could merely indicate investors expectations for either slower growth or lower Federal Reserve rates and not necessarily the two consecutive quarters of negative economic growth that marks a recession. It is worth noting that the US labour market continues to perform well. Job creation is high, while earnings growth is accelerating – both of which should continue to foster a decent pace of economic expansion in 2019.

Comments from the Federal Reserve on the overall health of the US economy and the possibility of recession remain key to the US Dollar. Fed member Bostic will be speaking today with a host of data releases, namely ISM manufacturing and income/spending figures, also set for release.

German inflation numbers beat expectations

Elsewhere in the FX market yesterday, German inflation numbers came in better-than-expected. While this provided little assistance to the common currency, it bodes well for this afternoon’s more significant Eurozone numbers. As we have mentioned for a while, a continued lack of core inflationary pressure will make it very difficult for the European Central Bank to justify raising interest rates any time soon. We also had some slightly better news from this morning’s revised PMI numbers, although they still remain bleak. The manufacturing index was revised upwards to 49.3 from 49.2, still comfortably in contraction territory.

Barring any major geopolitical news, we think that the EUR/USD rate could be fairly rangebound until Thursday’s all-important ECB monetary policy announcement.

Sterling traders await crucial parliament vote

As far as the UK was concerned, Thursday was a day fairly barren in terms of major market moving news, with no fresh developments on the Brexit front.

We are now in somewhat of a limbo period ahead of the next parliamentary vote, set to take place no later than 12th March. Any indication in the interim that MPs are ready to back any form of amendment that ensures a delay to Article 50 would be good news for the Pound in the coming days. The UK currency remains around its highest level in almost two years versus the Euro.