The run of dollar strength may come up against some near term profit-taking but the outlook remains strong. The clutch of tier one data throughout this week could shape the near to medium term outlook. We look at the position of forex, equities and commodities for the coming days.
The performance of the US economy in Q1 has been a standout to say the least. As the Eurozone has stumbled with PMIs dropping away, the US economy has smashed it. In recent weeks, there have been hints at data outperformance of the US gathering traction. Retail Sales, a reduction in the trade deficit and Durable Goods have all come in strongly ahead of expectation. As a result we have seen the US dollar breaking out. In Q1, traditionally the weakest quarter, the US grew an annualised 3.2% (at first reading) smashing both consensus expectations and the Atlanta Fed GDPNow. However, is this to be believed? Inventory stocking contributed +0.65%, whilst a steep decline in imports (a result of threatened China tariffs) suggest an unrealistically bloated Q1 growth that should unwind in Q2. Can the US keep up this kind of growth run rate? Already we see the flash PMIs dropping back and there will be significant focus on this week’s ISM data now. However, the dollar bull breakout came as the Eurozone relative underperformance has hit. German Ifo data disappointed and suggests the various trade disputes that the US continues to battle are negatively impacting on the Eurozone. This US economic outperformance is the source of current US dollar strength. Watch the market response on US interest rate futures. If they begin to price out a prospective Fed rate cut (currently a Dec 2019 cut is priced c. 60% probability on CMEGroup FedWatch), the dollar outperformance will continue. As ever, with a data dependent Fed, the data deluge this week could be crucial.