US GDP Prints Below Trend

Daily Analysis - 25/06/2015

Expectations for Interest Rates Upbeat in Spite of the Weak GDP Print

The final revision of first quarter US gross domestic product was not a shocker after printing in-line with estimates of a -0.20% contraction. The Federal Reserve remains firm in its own policy outlook despite the softness after reaffirming the commitment to raise interest rates in 2015.

US GDP Beckons Higher Rates

Federal Reserve officials hit the newswires yesterday with leaks outlining the seriousness of the intention to raise interest rates not once but twice before the end of 2015. This came on the heels of the final first quarter GDP reading which showed the economy contracted modestly over the prior period. With growth below trend, market participants are wary of the Federal Reserve raising rates during a period of cyclical weakness. However, the Federal Reserve is unwilling to let the market determine the future of rates as evidenced by the dismissal of the potential volatility that will emanate from any shift in policies. Markets were confident that the latest GDP reading was evidence of a rebound in the real economy as the contributions from rising inventories and spending on healthcare offset the weakness in exports and fixed-asset investment. Equities gave up ground during the cash session, led by losses in the Dow Jones Industrial Average.

French Unemployment Hits Record

With the anti-austerity and anti-euro movements gaining momentum across France, President Francois Hollande has his work cut out after unemployment hit a new high. Even though growth in the nation has accelerated at the fastest pace in years, much of this can be attributed to the weakness in the Euro which is helping to support exports. Nevertheless, unemployment or in the case of France the number of jobseekers has been rising for 80 consecutive months as the government appears powerless to stem the tidal wave of losses. Challenging labor regulations and lacking competitiveness along with an austerity budget have severely hindered the government’s ability to actually reverse the situation as budgetary rules trump fiscal stimulus. Although trending higher on optimism that a deal will be reached with Greece, the French CAC remains under pressure as Central Bank asset purchases fall short of expectations.

Greece Dismisses Creditor Proposals

Parties left negotiations early yesterday after Greece refused to concede to the IMF’s demands to lower pension obligations and focus less on tax increases versus spending cuts. Several officials remarked after the fact that the progress was insufficient and that nothing new had been proposed outside of existing requests. The Eurogroup Finance Ministers will be meeting today and negotiations with Greece are set to resume later today but optimism in the ability to reach an agreement is waning as time passes. The current bailout package is set to expire on June 30^th and without an agreement the European Central Bank will likely remove support for the Greek banking system which will lead to imminent capital controls. If any deal is reached, it will also be required to pass muster in the Greek Parliament which is becoming increasingly fractured. After trending modestly higher versus the Pound yesterday, the Euro is retreating once more.

EURUSD Equidistant Channel Technical Pattern

While notably weaker after corrected lower in recent sessions, the near-term uptrend in EURUSD remains intact despite the growing risks of a Greek exit and potential interest rate hikes in the United States in September. While the dollar has bounced back from recent losses, it has not found the momentum yet to notably change the prevailing trend. The equidistant channel pattern forming in the EURUSD currency pair reveals a bullish bias with the ideal strategy for taking advantage of the setup involving the initiation of positions at the lower channel line targeting the upper channel line. However, should prices move substantially below the lower channel line it could be indicative of a potential channel-based breakout that will be accompanied by additional volume and momentum to the downside.