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The downward revision to third quarter GDP in the U.S. has fueled a fresh wave of risk aversion across the financial markets.  The dollar is trading higher and if consumer confidence disappoints as well, we could see a further rally in the U.S. dollar and a sell-off in stocks.  Despite the better than expected economic data from Europe, traders across the globe have been in a gloomy mood for most of the morning.  This pessimism was set off by overnight weakness in Chinese stocks which fell after China's banking regulator yesterday asked the country's commercial banks to better manage risks and avoid year-end volatility in lending.

Adding to the woes was this morning's U.S. growth numbers. GDP was revised from 3.5 to 2.8 percent in the third quarter.  As we suggested in our daily report, downward revisions to the retail sales and trade numbers signaled that actual growth between July and September may not have been as strong as initially reported. Personal consumption took the biggest hit with growth revised to 2.9 percent from 3.4 percent. Although the third quarter was a period of recovery for practically all of the major economies, we are beginning to learn that the recovery may not have been as impressive as previously reported.

According to S&P/Case-Shiller, house prices rose for the fifth consecutive month.  Compared to August, house prices increased 0.33 percent but on annualized basis, house prices are still negative. The 9.36 percent decline in September was the least negative reading since December 2007.  Although this figure is at odds with the existing home sales data which has reported consecutive price declines, it does provide hope for the housing market and shows the degree of uneveness in the U.S. recovery.  

Consumer confidence, the Richmond Fed index and the House Price Index are due for release at 10:00AM NY Time followed by the FOMC Minutes from the November 4th meeting at 2:00PM NY Time.  Given the steep drop in the University of Michigan consumer confidence survey, we expect the Conference Board's index to confirm that sentiment is weak as well.  As for the Fed, their recent tone has been cautious and pessimistic. Unfortunately we expect this sentiment to be echoed in the minutes. Last week, Bullard suggested that the Fed may not raise interest rates until 2012 and overnight, he called on the Fed to extend its authority to buy Mortgage Backed Securities and Agency bonds beyond March. Although this represents a departure from his typically more hawkish stance, it is important to remember that Bullard is a non-voting member of the FOMC. Most FOMC members are still very cautious. Evans for example warned that the unemployment rate may not peak until 10.5 percent and not decline until the summer. The more cautious the Fed is, the less likely they are to implement an exit strategy and the more likely the dollar carry trade will remain intact.

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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.