The U.S. Dollar Pares Gains after Data Shows Durable Goods Orders Contracting - Outlook in Focus

© Robert Cicchetti, Adobe 

- USD eases after Feb durable goods orders data disappoints market.

- Equipment spending points to weak investment, GDP growth, in Q1.

- But USD to hold range, only a global upturn can topple King Dollar.

The U.S. greenback pared earlier gains during noon trading Tuesday, handing a fleeting moment of suport to the Pound-to-Dollar rate, after official data showed companies cutting back sharply on equipment expenditure during February. 

Durable goods orders fell by -1.6% in February, down from an upwardly-revised 0.1% gain in the New Year, when markets had looked for only a -1.1% decline. 

Core-durable goods orders, which remove aircraft sales from the data because of the distorting effect such large-ticket items have on underlying trends, rose by just 0.1% when consensus had been for growth of 0.3%.

"US durable goods orders contracted in February following a marginal advance at the start of the year," says Katherine Judge, an economist at CIBC Capital Markets. "Core capital goods shipments imply that business investment will be a modest positive for Q1 growth."

Durable goods data measures spending on all manner of equipment that is key for the continued operation and growth of U.S. companies.

Markets care about the data because it provides a telling insight into companies' willingness to invest in equipment, and therefore their short-term outlook for the economy. Durable goods orders are also an important component of business investment, which is a key input in the calculation of GDP. 

Insights into the extent that demand is either rising or falling are important for markets that are seeking to estimate economic growth within a given period, which is important for both the inflation and interest rate outlooks.

"Non-defence capital goods (ex-aircraft) shipments are on track to expand by a modest 4% annualised in the first quarter, which points to an equally modest gain in business equipment investment. With consumption growth unusually weak, we estimate that first-quarter GDP growth was a muted 1.5%," says Paul Ashworth, chief North American economist at Capital Economics. 

Shipments of freshly made goods rose during February and so too did inventories of manufactured goods. But the level unfilled work orders fell for fifth consecutive month and new orders for manufactured goods slipped for the first time in three months. This points to a slowdown in U.S. manufacturing ahead.

"The moderation in the survey evidence over the past few months, which reflects the global manufacturing downturn, indicates that underlying durable goods orders and shipments will continue to grow at a very modest pace over the next few months," says Ashworth.

Above: Pound-to-Dollar rate shown at daily intervals.

The Pound-to-Dollar rate was quoted -0.24% lower at 1.3033 following the release after paring back an earlier 0.33% loss. It is up 2.4% for 2019. 

"The support area (formed by the upside trendline and previous daily lows) around 1.2950-1.30 is crucial to watch in GBP/USD. A break lower would indicate that the short-term bias has shifted to the downside with 1.28 as an initial target. Prevailing risk that the UK could leave the EU without a deal is also weighing on EUR/USD. The March 7 low at 1.1177 is the key level to watch at this stage," says Jane Foley, a strategist at Rabobank.

The Euro-to-Dollar rate was 0.01% higher at 1.1207 after reversing an earlier fractional loss, but it's still down -2.27% this year. Meanwhile, the Dollar index was 0.17% higher at 97.39 and has risen 1.45% in 2019. 

Above: Euro-to-Dollar rate shown at daily intervals.

Tuesday's data is of increased importance to the Dollar because of recent changes in the global economic league tables. After three years of Federal Reserve (Fed) interest rate rises and a blockbuster 2018 for economic growth the Dollar has been dominant in the G10 league table. 

"The global monetary policy backdrop has shifted dramatically in recent weeks as central bankers have abandoned any hawkish pretenses. This has left the major currencies in a race to the bottom and in short supply of strong directional drivers," says Ned Rumpeltin, European head of FX strategy at TD Securities.

many analysts had in January suggested the White House tax cuts that supported growth last year would begin to wear off in in 2019, and that other economies elsewhere would experience a pick-up in growth. 

The consensus conclusion that followed from this was that markets would soon see an end to the Fed rate hiking cycle appearing on the horizon, as U.S. growth slowed and inflation pressures weakened, and that investors would increasingly look for the European Central Bank (ECB) to raise its own rates. 

That shift was supposed to bring about an end of the 2018 Dollar uptrend and prompt a sustained recovery of the Euro-to-Dollar rate.

Those analysts were right in that U.S. growth does now look to be slowing. However, growth in Europe and other places has slowed even further, so the Dollar has not yet capitulated from the highs seen last year.

"We have tempered our expectation for a weaker USD this year. Instead we think risks are balanced and largely two-way for most major currencies in the months ahead. This suggests range trading could continue until fresh catalysts emerge," Rumpeltin writes, in a recent briefing to clients. 

Above: Dollar Index (DXY) shown at daily intervals.

"These ranges will not last forever, but with the major central banks sidelined, it may be some time before a sustained move can get traction," Rumpeltin says. "With this in mind we think the spectrum of short-term risks could favor some additional USD strength."

As a result of 2019's developments in the global economic league table, neither the Federal Reserve nor the ECB are expected to raise rates at all in 2019. This has left the Dollar supported by a Fed Funds rate that is almost 3% higher than the Eurozone cash rate.

If weaker data were to encourage speculation of the possible Federal Reserve rate cut over the coming months then it could potentially undermine the Dollar and lift the Euro however, it could require a recovery of the Eurozone economy to generate a sustainable shift in currency markets.

In other words, Eurozone growth needs to pick up before the Dollar uptrend will well and truly come to an end although, and in the absence of this, weak U.S. economic data can temporarily undermine the greenback at times over the coming months.

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