US GDP Preview: Never underestimate the American shopper? Five scenarios for EUR/USD

The first release of US GDP tends to surprise and move markets – and this publication may be even more explosive due to the Fed's upcoming rate cut – the first since the crisis. The top-tier overview of the economy will shape the Fed's tone and the next monetary moves – and will also rock the USD.

US GDP is due on Friday, July 26th, at 12:30 GMT. Follow it live here.

What can we expect from GDP?

The US economy has probably slowed down in the second quarter. Investors expect an annualized growth rate of only 1.8% – below the "new normal" levels of 2-2.5% – and far from the 3.1% growth rate recorded in the first quarter. The robust number surprised markets three months ago – common in first releases – but fails to tell the full story.

It should be noted that part of the expected slowdown in real growth is due to an expected advance in the GDP Price Index, aka the "deflator." Weak annualized inflation of 0.6% annualized in the first quarter caused unimpressive nominal growth to look better in real terms.

Markets saw through that and the dollar failed to rise despite a growth rate of over 3% – considered robust. The deflator will be watched closely this time as well especially in case the headline figure meets expectations. 

Here are the expectations:

Hard data points up, soft data down

After looking at the big picture, let us dive into the details. Our US Economic Activity Recent Trends paint a mixed picture. Production activity is mostly neutral with one green sprout. Other hard data – figures detailing past actual activity look even better. The US consumer has been out and about – retail sales are trending up.

On the other hand, soft data – forward-looking surveys – are decidedly down. Almost all the manufacturing and services sector figures are trending lower – indicating lower activity. 

In the balance, these figures suggest that we may get a surprisingly robust first read of GDP, but that it may be revised down once more hard data feeds in. Revisions are due in late August and late September. But for now, there are higher chances of an upside surprise.

Gross Domestic Product	Impact	Last	Trend	Last 3	Last 5	Last 10
GDP Annualized	3	3.10%	Up	2.90%	2.98%	2.76%
GDP Price Index	3	0.60%	Down	1.33%	1.90%	1.89%

 

Production activity	Impact	Last	Trend	Last 3	Last 5	Last 10
Non-Def Cap Goods exAir	3	1.9%	Neutral	0.47%	0.52%	0.20%
Durable Goods	2	2%	Neutral	-0.47%	-0.06%	-0.16%
Durable Goods exDef	2	3.1%	Neutral	0%	0.08%	0.15%
Durable Goods exTrans	2	1.2%	Up	0.50%	0.40%	0.14%
Factory Orders MoM	2	-0.70%	Neutral	0.13%	0.00%	0.04%
Industrial Production MoM	2	0.00%	Neutral	-0.03%	-0.02%	0.06%

 

Sales activity	Impact	Last	Trend	Last 3	Last 5	Last 10
Retail Sales Control Group	3	0.70%	Up	0.40%	0.40%	0.31%
Retail Sales MoM	2	0.40%	Up	0.23%	0.42%	0.22%
Retail Sales exAutos MoM	2	0.50%	Up	0.33%	0.36%	0.17%

 

Manufacturing Surveys	Impact	Last	Trend	Last 3	Last 5	Last 10
ISM Manufacturing PMI	3	51.70	Down	52.20	53.22	55.36
ISM Prices Paid	2	47.90	Down	50.37	50.96	55.85
Markit Manufacturing PMI	2	50.00	Down	50.36	51.22	52.88
Philly Fed Manufacturing Survey	2	21.80	Up	12.90	12.18	11.83

 

Services-related Surveys	Impact	Last	Trend	Last 3	Last 5	Last 10
ISM Non-Manufacturing PMI	3	55.10	Down	55.83	56.66	58.02
Markit Services PMI	2	52.20	Down	51.53	52.58	53.70
Markit PMI Composite	2	51.60	Down	51.33	52.32	53.55
Chicago PMI	2	49.70	Down	52.17	55.98	58.72
Chicago Fed National Activity Index	2	-0.02	Down	-0.17	-0.19	-0.05

 

Surprise index also pointing higher

The FXStreet Surprise Index quantifies, in terms of standard deviations of data surprises (actual releases vs. survey median), the extent to which economic indicators exceed or fall short of consensus estimates.

After a long downtrend, there are tentative signs of a rebound that imply an upside surprise, in line with the Economic Activity Recent Trends. 

When examing data since 2011, we can see green shoots in recent weeks.

A closer look at data since 2018 shows an even better picture. We can note a series of higher lows and perhaps a return to upside surprises. The uptrend support line is becoming stronger with the recent data.

All in all, there is a higher chance of an upside surprise than a downside one.

How to trade the US GDP with EUR/USD

After having analyzed the GDP data, let us move to trade the news with EUR/USD. The world's most popular currency pair has hit new two-year lows after the European Central Bank hinted at more monetary stimulus in September but then bounced on the lack of detail.

Nevertheless, President Mario Draghi's words that "the outlook is becoming worse and worse" weigh on the common currency. The deteriorating outlook goes hand in hand with the long-term downtrend in EUR/USD which seems set to persist.

In the US, a rate cut of 25 basis points is already priced in. The greater question is: will the Federal Reserve reduce interest rates just once – an "insurance cut" – or will it embark on a series of an interest rate cuts? The former option is the more probable one. James Bullard, President of the Saint Louis branch of the Federal Reserve and a known dove, wants to settle for just one cut. There are only a few voices calling for more substantial moves.

Therefore, it would probably take a substantial downside surprise to tilt the world's most powerful central bank into a long cycle of interest rate cuts. However, if contrary to all the previously mentioned figures, GDP shocks with an awful number – it may turn positive for the US dollar.

The greenback is a safe-haven currency that is sought in times of trouble – even if these troubles originate in the US. And when the US sneezes, the world catches a cold. Or in other words – if the US struggles, the eurozone suffers even more.

Overall, the USD may beat the euro in almost every scenario.

Before we move onto the scenarios, let us examine the current technical picture of EUR/USD.

EUR/USD Technical Analysis

The Relative Strength Index (RSI) has bounced above 30 – exiting oversold conditions. However, momentum remains to the downside and the pair trades below the 50, 100, and 200 Simple Moving Averages on the four-hour chart.

Technical lines from top to bottom include 1.1290 that capped the pair several times in July, 1.1240 that separated ranges in June, 1.1195 and 1.1180 that provided the basis for the broken uptrend support line, 1.1155 that capped it earlier this week, 1.1120 which served as support in late May and the fresh 2019 low of 1.1101.

Here are five scenarios.

1) Within expectations - EUR/USD may struggle

If the US economy grows by 1.5% to 2.0% it may be low growth in absolute terms but within expectations – and will allow the Fed to reduce rates only by 25bp as a "one and done" event. 

EUR/USD may respond by grinding lower. The probability is medium. The full reaction may be determined by the deflator and the components.

2) Upside surprise - EUR/USD may fall

If the US economy returns to the "new normal" of 2-2.5% it will not stop the Fed from cutting rates, but may boost the greenback across the board on diminishing chances of any follow-up. 

EUR/USD may suffer a more significant fall. Our tools indicate that this option has a high probability.

3) Small downside surprise – EUR/USD may rise

If the US economy grew at a meager growth rate of only 1-1.5%, speculation of more than one rate cut may rise and the USD may fall across the board. 

In this case, even the vulnerable euro may retreat. The probability is low.

4) Significant upside surprise - EUR/USD free-falls

The chances of a growth rate above 2.5% are low, but the option cannot be ruled out. In this case, some will begin doubting the Fed's prospects of a rate cut and the greenback may surge higher.

For EUR/USD, it means a free-fall with 1.1000 in its crosshairs. The probability is low.

5) Significant downside surprise - EUR/USD suffers

As mentioned earlier, if the US sneezes, the world catches a cold. In the extreme scenario of sub 1% annualized growth – basically, a standstill – investors may fear the fate of global growth and send the safe-haven yen and dollar higher.

EUR/USD may initially rise but then surrender to the might of the greenback. The probability is low.