EUR/USD Rate Risks Larger Rebound As U.S. GDP Forecast Deteriorates

EUR/USD continues to retrace the sharp selloff following the European Central Bank (ECB) meeting as U.S. data prints point to a slowing economy, and the exchange rate may stage a larger rebound over the coming days as it initiates a string of higher highs & lows.

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EUR/USD RATE RISKS LARGER REBOUND AS U.S. GDP FORECAST DETERIORATES

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EUR/USD extends the advance from earlier this week as the U.S. Consumer Price Index (CPI) unexpectedly narrows to 1.5% from 1.6% per annum in January, with the core rate of inflation highlighting a similar dynamic as the gauge slips to 2.1% from 2.2% during the same period.

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Looking ahead, updates to the U.S. Durable Goods Orders report may also produce a bearish reaction in the U.S. dollar as demand for large-ticket items are expected to contract 0.4% in February, while Non-Defense Capital Goods Orders excluding Aircrafts, a proxy for business investment, are projected to fall 0.2% after holding flat the month prior.

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As a result, the Atlanta Fed’s ‘GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the first quarter of 2019 is 0.2 percent on March 11, down from 0.5 percent on March 8,’ and the Federal Open Market Committee (FOMC) may continue to alter the forward-guidance at the next interest rate decision on March 20 as ‘some risks to the downside had increased, including the possibilities of a sharper-than-expected slowdown in global economic growth, particularly in China and Europe, a rapid waning of fiscal policy stimulus, or a further tightening of financial market condition.’

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Image of fed summary of economic projections

It seems as though the FOMC has long but abandoned the hiking-cycle as the central bank prepares to taper the $50B/month in quantitative tightening (QT), with Chairman Jerome Powell asserting that ‘the Committee can now evaluate the appropriate timing and approach for the end of balance sheet runoff’ as Fed officials lower their forecast for growth and inflation. It remains to be seen if there will be a further adjustment to the Summary of Economic Projections (SEP) as the previous update still indicate a longer-run interest rate of 2.75% to 3.00%, and a material change it the Fed forecasts are likely to impact the near-term outlook for the U.S. dollar as the central bank drops the hawkish forward-guidance for monetary policy.

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