U.S. GDP Growth Contracts 6.1 Percent

Last updated 4/29/2009 8:44 AM ET (GMT -5) 0 Comments - Add your comment

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Kathy Lien

Director of Currency Research, GFT

U.S. GDP growth contracted by 6.1 percent in the first three months of the years,sending the U.S. dollar tumbling against  Japanese Yen and rising against higher yielding currencies.  The data was much worse than the market's forecast which is part of the reason we are seeing a fresh wave of risk aversion this morning.  The sharp drop off came from a decline in private investment and a contraction in both imports and exports.  Government spending also fell for the first time 6 quarters.  However there is a silver lining report which is personal consumption which rose 2.2 percent after falling for 2 consecutive quarters.  It was trade and not consumer spending that dragged down growth. This offers mild relief as consumer spending represents the backbone of the U.S. economy.  If spending is picking up, the stabilization story can still play out as long as we do not have another big shock in the financial sector.  That is a big IF and one that will take time to play out. Meanwhile inflationary pressures have also increased with the GDP price index and core PCE ticking higher.  

The dollar's reaction to the GDP growth may be limited ahead of FOMC this afternoon.  

FOMC Preview  

The market expects the Federal Reserve to leave their FOMC statement largely unchanged which includes leaving their growth forecasts and purchase programs intact. This is very important because any changes will trigger a reaction in the currency market. If the Fed cuts their growth forecasts or expands their asset purchase programs, it would be dollar negative. If they leave their forecasts unchanged, which is what we expect, it could actually accelerate the gains in the U.S. dollar. It is very unlikely that the central bank will increase the size of their asset purchase program given the recent improvements in the financial markets including the rally in U.S. equities and the narrowing of the LIBOR and Overnight Swap Index (OIS) spread. Economic data has been mixed since the last meeting with manufacturing, housing and consumer confidence stabilizing. However the labor market remains very weak and that will cause some gray hairs for the members of the Federal Reserve’s monetary policy committee. Therefore it would be premature for the Fed to adopt an optimistic tone. Central bank rate decisions have become less and less important and therefore unless any major changes are announced, which we do not expect, the currency market’s reaction following the FOMC meeting should be limited.

Focus on the Fed

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About The Author

Kathy Lien began her FX trading career 10 years ago at J.P. Morgan Chase. After graduating New York University’s Leonard Stern School of Business at the age of 18, Kathy joined the bank's interbank FX trading desk and eventually moved to the cross markets proprietary trading desk. In the interbank market, her ability to create solid fundamental and technical analysis from the myriad of information on the market helped her trade forex spot and options. Her experience eventually led her to be chief strategist at Daily FX where she worked until she joined GFT in 2008.

With her knowledge of forex, as well as her experience trading other products, such as interest rate derivates, bonds, equities, and futures, Lien has built a reputation as an international currency analyst. She is frequently quoted on CNBC, Bloomberg, Fox Business and Reuters. Lien has also written for publications like Active Trader, Futures, and SFO magazine. She is the author of the newly updated Day Trading the Currency Market: Technical and Fundamental Strategies to Profit from Market Moves, and the co-author of Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game with Boris Schlossberg.

To buy Kathy’s newly updated Day Trading and Swing Trading the Currency Market: Technical and Fundamental Strategies to Profit from Market Moves, click here.