US Dollar Slips as Wider Trade Deficit Signals Downward Revisions to Q4 GDP (page 1 of 2)

DailyFX Fundamentals 02-13-07

By Kathy Lien, Chief Strategist of DailyFX.com


US Dollar

The larger US trade deficit has helped to contribute to the US dollar's weakness, but most of the sell-off in the greenback today was triggered by positive Eurozone data and the continual liquidation of short Yen trades. The trade deficit broke back above the $60 billion mark to rise to -$61.2 billion in the month of December. Imports increased due to rising oil prices and demand for foreign autos and apparel. The deterioration in the trade balance in the last month of the year suggests that fourth quarter GDP may not be as strong as initially reported. Back in January, the advance release of fourth quarter GDP was 3.5 percent. This estimate was based upon a far smaller trade deficit and now that the deficit has widened, fourth quarter GDP growth may be much closer to the 2 to 2.5 percent range. Tomorrow we have the marquee events of the week, namely US retail sales and Federal Reserve Chairman Ben Bernanke's semi-annual testimony on the economy and monetary policy. Consumer spending accounts for 70 percent of US GDP and how it fared last month will determine whether the market continues to give weight to the effects of today's trade report on fourth quarter GDP. Incoming weekly and private sector spending data has been strong but the weakness in auto sales could hold back overall spending. Gas prices did not change much in January which means that it will have little impact on the overall release. Instead, we are watching gift card purchases since it was a big contributor to the retail sales report last January. As for Bernanke, odds are in favor of more optimistic comments from the Federal Reserve Chairman. He will most likely pat himself on the back for the rebound in growth. Inflation will continue to remain a concern for the central bank but at the same time, the housing market is only beginning to stabilize and they may signal that they need more time to review incoming data before considering raising interest rates.

Euro

Strong GDP numbers has pushed the Euro back towards the upper part of its month long range against the US dollar. In fact, the currency pair is now trading within 30 pips of its range high. As we speculated, analyst sentiment was not as optimistic as the consensus forecast for the month of February with the ZEW survey rebounding from -3.6 to a lower than expected 2.9. However, the market chose to place more weight on the sharp upside surprise to more backward looking GDP data. Fourth quarter growth accelerated by 0.9 percent on a quarterly basis and 3.3 percent on an annualized basis, which compares to the market's 0.6 percent and 3.0 percent forecasts. Strength was seen all around with stronger growth reported by Germany, France and Italy. In fact, Italy produced the biggest upside surprise. Such strong numbers encouraged ECB Weber to talk up the outlook for growth and he even indicated that lower oil prices will help to minimize the impact of Value Added Tax increase. Looking ahead, the latest GDP data continues to suggest that the ECB will be raising interest rates next month. There is no significant data from the Eurozone Wednesday and Thursday, but there are a number of policy officials speaking including Trichet and their comments should continue to be supportive for the Euro.

British Pound

The British pound lost value against the Euro and struggled to rally against the US dollar today after consumer prices fell short of expectations.