EUR/USD logged its best day in five months as U.S. GDP overshadowed the European Central Bank’s monetary policy announcement. According to the latest report, the U.S. economy grew by only 2% in the third quarter, which was the weakest pace of growth since the pandemic-induced global shutdown in the second quarter of 2020. That was when the GDP dropped a staggering 31.2%. Economists were looking for GDP growth of 2.8%, which is a significant slowdown from last quarter’s pace, but 2% misses all of the marks. Business investment, government spending and trade contributed to the decline, but consumer spending had the most significant impact on growth. Supply-chain disruptions hampered product availability, while concerns about the Delta variant reduced activity in restaurants, factories and stores. With the market fully pricing in taper by the Federal Reserve, today’s GDP report confirms that Chairman Jerome Powell will most likely downplay rate hikes next week. Earlier this month, he said point blank: “I do think it's time to taper, and I don’t think it's time to raise rates.” We firmly expect the Fed chair to repeat this line at next week’s FOMC meeting. The U.S. dollar sold off across the board in the New York session.
The euro was the biggest beneficiary of U.S. dollar weakness, and the lack of demand for the greenback was the only reason for the currency’s rise. The ECB left monetary policy unchanged, but unlike its global counterparts, it is less worried about inflation. According to ECB President Christine Lagarde, “We did a lot of soul searching to test our analysis and we are confident” that the surge in inflation will prove temporary. She added, though, “it will take a bit longer than expected.”
Lagarde also pushed back on the market’s expectations for an interest rate increase next year, saying, “Our analysis certainty does not support that the conditions of our forward guidance are satisfied at the time of liftoff as expected by markets, nor any time soon thereafter."
Unlike many other central banks that have reduced stimulus, ending their quantitative easing programs or raising interest rates, the ECB is making it very clear that it is looking the other way on inflation. This should have driven the euro lower, but the single currency has been underperforming in recent weeks and the sell-off in the U.S. dollar today triggered a massive short squeeze in EUR/USD.
Friday is another busy day in the markets, with third quarter GDP and October CPI numbers due from the Eurozone. The U.S. releases the Fed’s favorite inflation measure, the PCE deflator along with personal income and spending. With such important releases on the docket, traders should expect more volatility in the single currency. The Australian and Canadian dollars will also be in focus, with Australian retail sales and Canadian GDP numbers due for release. Despite the Bank of Canada’s hawkish announcement on Wednesday, the Canadian dollar was the laggard today. Its gains against the greenback paled in comparison to other major currencies, like AUD, NZD, EUR and GBP.
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