Will Euro Traders Look Past Double Dip Recession?

The three most important event risks on this week’s calendar are FOMC, U.S., and Eurozone first-quarter GDP. On Wednesday, we learned that while the Federal Reserve is optimistic, they still want 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 percent between January and March, up 4.3% from the previous quarter. In response, investors bid the 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.

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On Friday, the Eurozone releases its first-quarter GDP report and another technical recession is expected. Unlike the U.S. who enjoyed 3 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 U.K. this week as the pair quietly trended upwards. 1.40 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 3 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 they reduced asset purchases and brought forward their 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.

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