The Pound-to-Dollar Rate Finds Support Even after U.S. Data Points to Growth Pickup
- Written by: James Skinner
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- USD hits post-May 2017 high as 'divergence' narrative returns.
- Durable goods data lifts USD ahead of Q1 GDP No. due Friday.
- TD Securities says USD is now vulnerable to disappointment.
The Dollar was riding high Thursday, keeping the Pound-to-Dollar pair and many other exchange rates under pressure, after durable goods orders data pointed to a pick-up in U.S. business investment during March just a day before the first-quarter GDP number is released.
Thursday's economic data from the U.S. initially provided the greeback with a sharp boost, which added to an existing intraday gain, although the Dollar's strength has since begun to wane and enabled the Pound to find some support after days of losses.
However, it remains to be seen whether the respite for Pound Sterling and other currencies like the Euro will last, not least of all because first-quarter GDP data is due out of the U.S. on Friday and threatens to reignite speculation of divergence between the major economies.
Durable goods orders rose 2.7% in March when markets had been looking for only a 0.7% gain, while February's decline of -1.6% was revised to a lesser -1.1%. Core durable goods orders advanced 0.4% despite markets looking for only a 0.2% gain, although February's 0.1% gain was revised to -0.1%.
The data is an important component of business investment, which is a key input in the calculation of GDP, although the core number is considered the most important because it excludes transportation items like aircraft, which are expensive and can distort the underlying trend in spending among companies.
"Business investment indicators perked up in March, with durable goods orders advancing by an above-consensus 2.7%. However, that was flattered by a lofty and unexpected gain in transportation orders," says Katherine Judge, an economist at CIBC Capital Markets. "The 4.2% three-month average annual pace of growth confirms that business investment will be a positive for Q1 GDP and places some upside risk around our below-consensus forecast for tomorrow's release."
Actual shipments of manufactured goods grew by just 0.3% to $259.6 bn in March and unfilled orders rose by the same amount, only to $1.18 trillion, while inventories rose 0.3% to $420.5 bn. Non-defence capital goods equipment orders rose 6.5% that month, to $80.5 bn.
Markets care about the goods orders data because it provides a telling insight into companies' willingness to invest in equipment, and therefore their short-term outlook for the economy.
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.
"About half the headline leap was due to a surge in orders for civilian aircraft, which are wildly volatile from month-to-month; the underlying trend is about flat," says Ian Shepherdson, chief U.S. economist at Pantheon Macroeconomics. "The jump in orders could easily be revised down substantially but for now it is a very welcome surprise, adding to the evidence that the manufacturing downturn is coming to an end, a bit sooner than we had anticipated."
Above: Pound-to-Dollar rate shown at 4-hour intervals.
The Dollar index was 0.17% higher at 98.22 during the noon session Thursday and has now risen 2.3% for 2019, while the Pound-to-Dollar rate was -0.08% lower at 1.2891 but is still up 1.2% this year. The Euro-to-Dollar rate was -0.12% lower at 1.1138 and has fallen -2.8% in 2019.
Above: Dollar Index (DXY) shown at four-hour intervals.
U.S. GDP data for the first-quarter will be released on Friday and economists have been nudging their estimates for the number higher all month, with currency markets gradually beginning to take note. That's boosted the Dollar but also left it vulnerable to disappointment.
This week's data matters because it is being released with financial markets focused on economic growth differentials between major economies, and as the U.S. economy appears to be puttering along at a reasonable pace while the Eurozone is struggling to demonstrate any growth at all. However, the end of April and beginning of May could mark an inflection point for that trend.
Eurozone GDP data will be released next week and throughout the subsequent month more survey-based indicators will provide an early steer on the likely pace of growth seen at the beginning of the second quarter.
"With the USD now trading at fresh highs against most major currencies, we think it could be increasingly exposed to any data disappointments - particularly as the US data surprise index continues to falter," says Mark McCormick, head of FX strategy at TD Securities.
Above: Relative economic data surprises. Source TD Securities.
Economic growth differentials are often a reasonable predictor of the gap between yields on short-term bonds of two countries and those yields have significant influence over currencies because international capital tends to flow in the direction where the outlook for relative returns is most favourable.
Growth differentials impact the bond market because of what the various economic numbers might mean for central bank interest rate policies across the world. Consensus still suggests the U.S. economy will slow sharply in 2019, ending the Federal Reserve rate hiking cycle in the process, and that a pick-up in growth across other parts of the world will put interest rate rises back on the table in Europe and elsewhere.
"We think the broad USD has peaked and should begin declining soon. There are signs that the global economy is not only stabilizing but rebounding are growing, as seen in China PMIs and global trade volumes. Meanwhile US data continue to soften and US nominal and real yields remain under pressure," says a recent note from Morgan Stanley, in a typical expression of the Dollar consensus. "DXY faces resistance at the previous high of 97.10."
Such an outcome would be a death knell for the 2018-2019 Dollar rally that has helped keep the Euro-to-Dollar pair and many other exchange rates under the thumb during recent months, only the 2019 story thus far has not panned out in the way the market had imagined it would.
Federal Reserve rate setters moved to the sidelines in January after an economic slowdown in Europe and China, as well as volatility in emerging world financial markets, stoked concerns about the U.S. economic and inflation outlook. Now many say the U.S. economy appears to be slowing.
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