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US Economy Approaching Recession

Optimistic Expectations for US Economic Expansion Revised Lower Amid Underwhelming Data

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The momentum lower in the dollar continues unabated as weakness in key indicators show that the risks to the US economic outlook are substantial. The disappointing retail sales data coupled with sluggish GDP growth evidence the lingering impact of the dollar’s rapid appreciation last year.

US Retail Stalls

The persistent weakness in consumption is continuing to drag on the US economic outlook as evidenced by the latest revision lower in the Atlanta Federal Reserve’s modeling of second quarter GDP expectations. Retail sales fell flat in April, with no visible expansion except for a modest rise in the core figure by 0.10%. Both the core and regular retails sales figures printed well below expectations, making the revision higher to March’s figures look more like a temporary aberration than a change in the overarching trend. The signs of an impending recession are growing especially with increased probability that first quarter GDP numbers will be revised to negative from the marginally positive print recorded during the preliminary figures. Stocks were relatively unfazed by the announcement with the real move occurring in the dollar which continues to weaken in-line with the softness in underlying economic fundamentals.

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Euro GDP Outperforms

While the American economy continues to languish as the appreciation in the dollar cuts into the growth outlook, Europe is seeing expansionary economic momentum accelerate. Aggregate GDP figures for the region released yesterday showed that the Euro Area economy grew at a 1.00% annualized pace, upgraded from 0.90% realized in the prior period. Quarterly growth also improved, climbing to 0.40% and fueling optimism that the impact of Mario Draghi’s quantitative easing policies are being broadly felt across the monetary union. French and Spanish growth specifically has seen an uptick to the fastest pace in years even with lingering concerns about unemployment and economic competitiveness. Although growth has improved, industrial production hit a setback after recording a -0.30% month over month contraction. The Euro has continued to appreciate against the dollar as pronounced weakness in the latter fuels a rebound in the EURUSD pair.

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Bank of England Warns on Outlook

Following the interest rate decision earlier in the week, the Bank of England released its inflation report yesterday which was coupled with comments from Governor Mark Carney. While confirming that growth remains solid, the revision downward in the outlook for certain indicators such as gross domestic product and wage growth specifically highlights the increasing challenges facing the Central Bank. Wage growth has been especially strong amid lacking inflation and strong gains in the jobs market. There are a multitude of positive catalysts that remain supportive of strong expansion including the recent gains in the unemployment rate which fell to 5.50%. Nevertheless, with inflation unlikely to hit the 2% long-term target for another 2-years, the prospect of rate increases in the near-term is very low with some economists predicting the next rate hike as far out as 2017. GBPUSD continues to trend higher on the back of dollar weakness.

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USDJPY Descending Triangle Technical Pattern

The unwind of carry-trades has been particularly vicious as the dollar selloff picks up in pace following the latest disappointing data points. In light of the downgrade to the US growth outlook, the dollar has substantially reversed from last year’s exuberance as expectations of higher interest rates disappear from view. The descending triangle pattern setting up in the USDJPY currency pair has a predominantly bearish bias as prices consolidate between the multi-month downtrend and horizontal support at 118.49. Any move below the key support level could signal a breakout trade targeting more losses to the downside in the USDJPY pair. Should economic data improve and the pair move above the prevailing downtrend line this could signal a potential reversal in prices to the upside.

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