Will Q1 GDP Show a Recovery?

2 May, 2017

The UK and the Eurozone Markit Manufacturing PMI for April will be released today at 09:30 BST. German Unemployment rate and Unemployment change for April will be released at 08:55 BST Wednesday May 3. It will be followed by the Eurozone Q1 GDP initial readings (YoY and QoQ) at 10:00 BST.

The German unemployment rate saw a notable downtrend since early 2014. The reading in March was 5.8% hitting a record low. Eurozone GDP readings (YoY and QoQ) have been oscillating steadily in a range between 1.5%-1.7% and 0.3%-0.6% respectively since September and February 2015. The market is expecting the upcoming Q1 GDP to show 1.7% yearly and 0.5% quarterly expansion.

ECB Governor Draghi stated last Thursday that “the Eurozone economic recovery is becoming increasingly solid, and the downside risks have further diminished”. However, inflation has not yet seen a convincing upward trend.

Recent underperforming US economic data has provided support to EUR/USD; holding above the psychological level at 1.0900. If the upcoming German labour market data and the Eurozone Q1 GDP outperforms, then we can expect continuing strengthening of EUR, and a rise in European equity markets.

The FOMC meeting will be held on Wednesday May 3. Markets expect the Fed to raise rates in June instead of May. Nevertheless, we might get further clues about the probability of a rate hike in June from Fed Chair Yellen’s tone of her speech. The recent weak US economic data might make Yellen’s speech less hawkish. Per the CME’s FedWach tool, the probability for a rate hike in June is 67.4%.

The dollar index saw a rebound and attempted to recover the psychological level at 99.00, after hitting a 1-month low of 98.55 on April 25. It was helped by the US Congress’ agreement on a $1 trillion budget deal to maintain the operation of the US federal government until 30 September.

Trump has proposed cuts on several science budgets aiming to reduce the US government’s financial stress. The cuts in budgets include the Environmental Protection Agency (EPA), the National Institutes of Health (NIH) and the National Science Foundation (NSF). However, Congress has already rejected the NIH budget cut.

Trump has been trying to finance his tax reform bill in several ways; such as replacing Obamacare and cutting the science budget. Unfortunately, both attempts have failed. There seems to be plenty of hurdles in Trump’s administration. The prospect of the US government’s financial condition still remains less than optimistic.

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