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The tech stock selloff continued overnight as Facebook remained under pressure, sending the Nasdaq a further 1% lower. A rotation out of tech stocks into safer government bonds sent US treasuries and demand for defensive stocks soaring. Whilst the S&P also ended lower, the Dow closed flat.
UK GDP in focus
From a data perspective today promises to be the most eventful day of the week. First up, the UK GDP, which is expected to show that the British economy expanded by a limp 0.4% quarter on quarter or 1.4% year on year. The stalling of economic growth as Britain continues to face Brexit headwinds, will be laid bare today and magnified following the upbeat 2.9% annual growth recorded in the US. Even closer to home, in the European Union, the UK is still a clear laggard behind other major economies with Germany’s economy growing 2.2% in 2017 and France by 1.9%.
With business investment anemic at best and UK households strained under intense financial conditions of rising prices and falling wages for the fourth quarter, any surprise to the upside is looking slim.
With traders optimistic of a rate hike from the BoE in May, a disappointing read could dampen hopes, pulling the pound lower.
Will US Inflation Move Closer To Target?
A slew of US data will ensure that traders don’t slip away from their desks early in the run up to the long Easter weekend. Whilst the forecast for PCE, the Fed’s preferred measure of inflation, points to an increase, a move in the right direction, there are still plenty of reasons to remain cautious.
Inflation in the US has been failing to lift off over recent months, with core PCE stagnant around 1.5% and core CPI remaining constant around 1.8%. Whilst the rest of the US economy is clearly booming, inflation so far has not been playing ball. The inflation mystery has even caused some Fed policy makers to call for patience at the central bank, wishing to see more convincing signs of inflation materializing before hiking again. Yet given that the Fed’s recent hiking action in 2 out of the previous 3 meetings, policy makers don’t appear to be paying too much attention to these pleas.
Core PCE is forecast to hit 1.6% in February, up from 1.5% in March. Given that Core CPI remained constant in February, retail sales declined, and average wage growth slowed, the risks appear to be stacked to the downside, making a disappointing print more likely.
The market sees no possibility of the Fed raising rates at its next meeting and is currently pricing in a 78.8% probability of a rate hike in June. With the economy having already proved itself in the previous session, with growth of 2.9%, any signs that inflation is also moving towards the Fed’s 2% target could send the dollar soaring., extending gains from Wednesday’s session.
GBP/USD back to $1.40?
GBP/USD dropped over 0.5% across the previous session, hitting a low of $1.4070 following upbeat US GDP data and disappointing CBI retail sales numbers. Should the PCE figures impress we would expect the decline in GDP/USD to continue towards the key psychological level of $1.40, beyond which $1.3935 comes into target.
On the other hand, should the PCE print at 1.5% or lower a push back towards $1.4120 could be expected before opening the doors to $1.4150.
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