Why US GDP Is So Important To The Dollar

Market Drivers for September 26 2014
USD/JPY retakes 109.00
Aso – no decision on sales tax until end of 2014
Nikkei -0.88% Europe -0.04%
Crude Oil $92/bbl
Gold $1224/oz.

Europe and Asia:
EUR GFK Consumer climate 8.3 vs. 8.5
EUR GE Import Prices -0.1% vs. -.0.2%

North America:
JPY Tokyo CPI 2.6% vs. 2.7%
USD GDP 8:30
USD U o M 9:55

Its been a quiet night of trade in the currency market with most of the majors tracing out narrow ranges in Asian and early European dealing as the economic docket on the final day of the trading week remains essentially barren.

The EUR/USD has remained bid holding around the 1.2750 level as it tried to stabilize after yesterday’s slide to 22 month lows. The sentiment against the pair continues to be very negative but further downside action will now have to be driven by better U.S. data in order to support the divergent monetary policy thesis.

As we noted yesterday, while markets appear to be nearly certain that the Fed will begin hiking rates as early as Q1 of 2015, the U.S. policy makers themselves are far more cautious. Although Richard Fisher reaffirmed his calls for quicker pace of tightening – he is a well known hawk who retire next year. We believe that the core of the FOMC is far more in alignment with Charles Evans who noted that the greatest risk in Fed policy is to act too soon, citing the 1937 action as the prime example of a colossal policy mistake.

That’s why today’s U.S. GDP data may loom large in the market’s view. Some dollar bulls are calling for an upward revision of up 5%. The market is currently anticipating an upward bump to 4.6% from 4.2%. If the data comes in anywhere near the heightened expectations of growth the Fed would be hard pressed to maintain its dovish stance in the face of such powerful growth.

The dollar is likely to resume its push higher under this outcome with USD/JPY likely testing the recent highs of 109.50 as it eyes the seminal 110 level which it has not seen since 2008. However, if the data comes just in line, the dollars bulls are likely to be disappointed. With the market so stretched to the dollar long side any miss in expectations could trigger a profit taking move in which case the EUR/USD could squeeze back to the 1.2800 level as the day proceeds.