FX Daily: Stark Growth Gap Makes the Dollar Even Harder to Sell

USD: Growth and rates gap more and more favourable

Right after an uneventful ECB announcement, US GDP figures beat estimates and confirmed the growth differential between the US and its key developed peers is significantly wide – and widening. As discussed in this analysis by our US economist, the GDP surge to an annualised 4.9% in 3Q was primarily due to consumer and government spending. We don’t expect such strong performance to be repeated in the fourth quarter, where we're forecasting 1.5% growth. For now, the evidence of the strong growth momentum into the last part of the year is adding fuel to the higher-for-longer rate narrative.

The dollar’s reaction was quite muted: we don’t think this was due to any impact from the ECB, but rather to the 3Q US PCE figures, which came in lower than expected at 2.4%, and potentially jobless claims climbing back to 210k. There is also a building trend for the dollar to find less and less upward momentum after some strong releases. That is consistent with the overbought condition of the greenback and the notion that we might be close to the peak in US activity data optimism. In this sense, we could see data outside of the US (i.e. in the eurozone or in China) having a greater impact on global market dynamics as they have done in the past few weeks.

Still, when we strip out the immediate market impact of the data releases, the case for a stronger dollar continues to consolidate. If personal income and PCE figures for September fail to steer the FX market drastically today, we still feel that the dollar may stay broadly supported into the weekend, and we would favour fading any (USD-negative) position-squaring upward correction in the crosses.

EUR: Downside risks after a non-eventful ECB

We had suspected the ECB wanted a “quiet” meeting yesterday. If that was indeed the intention, we may call it one of the most successful ECB meetings from a communication standpoint in the Lagarde era. Here is how our economics team saw yesterday’s event.

With no new guidance and Lagarde having even avoided touching upon non-rate monetary policy tools' tweaking, the impact on markets was quite negligible: eurozone bonds slightly stronger, EUR almost unchanged. It is clear now that the euro will not be able to draw any substantial benefit from a more hawkish ECB, and markets have all the reasons to keep rate expectations depressed on the back of the deteriorating growth outlook. The slight rebound in EUR/USD overnight appears to be due to the improvement in global risk sentiment after a round of good US tech earnings.

We discussed above how the dollar has appeared less responsive to strong US data releases, and there has been a broader impact of eurozone data; it will be interesting to see whether this continues to be the case after the dovish hold by the ECB. Either way, with eurozone data unlikely to turn materially stronger in the near term, and rate/growth differentials pointing south, we retain a short-term bearish bias on EUR/USD.

GBP: Swinging rate differentials

The UK data calendar has been quiet since jobs data and PMIs were released on Tuesday, leaving sterling almost entirely driven by external dynamics. With less than a week to go to the Bank of England meeting and the MPC members in the black-out period, markets have cemented their view there will be no change at any of the upcoming policy meetings. The dovish repricing in the BoE rate expectations has sent GBP/USD in negative territory (-9bp) and to the lowest since April.

Risks remain skewed to further attempts to the 1.2000 key support in the short term in Cable as the dollar still appears to have room to catch up with its better rate profile. The recent EUR/GBP rally to the 0.8700 handle may have run out of steam after the ECB meeting, even though we favour longer-term bullish positions on the pair.