EURUSD in C&H Ahead of US GDP

With the Fed in blackout mode and a weakening consensus on a hike at the next meeting, can flash GDP figures derail market expectations?

Growing But Slowing

The US is expected to report flash GDP, showing that the economy continues to grow but at a slower pace. The consensus is for 2.3% annualised growth, compared to the 2.6% reported in the last quarter of 2022. The Fed's GDPNow tracker is a bit more optimistic, forecasting 2.5% in the final edition before the data release.

Notably, the release comes along with quarterly core PCE figures, which are the preferred measure of the Fed in setting policy. However, the monthly data weigh much more on the Fed and, therefore, the markets. The consensus is that Q1 PCE will show a slowing pace of inflation to 4.1% from the 4.4% reported last time.

It's Up To the Fed Now

Recent PMI figures were more upbeat than expected, pointing to a potential resurgence in the economy - right after the Fed finally acknowledged that a recession is likely in the second half of the year. Traders are pretty sure the Fed will raise rates next week, with the number of supporters fluctuating between 80-90%. As a reminder, through the latter half of March, the Fed reversed its QT program, putting hundreds of billions back into money markets. Since the start of the new quarter, it has returned to rolling bonds off its balance sheet. That might provide a little boost to the economy, particularly durable goods that will be published on Wednesday.

Attention is now turning to the debt ceiling debate, with investors looking to stay out of the 3-month bill range since sometime in June, when current forecasts expect the Federal government to hit the limit. No one expects a default, but a last-minute agreement could put some uncertainty into the markets and potentially give the Fed reason to keep a little more liquidity in the markets through the summer.

EUR/USD C&H Pattern More Evident

The price action of EUR/USD appears to have formed a U-shaped ‘cap and handle’ (C&H) pattern, with the ‘handle’ either complete or about to complete soon. If prices fall under $1.09, it would signal a deeper correction for the ‘handle’, opening the door to $1.0831. However, breaking past the local peaks of $1.1067 and 76 will expose $1.12 should $1.1121 gives way to bullish price action.

Key Takeaways

The upcoming flash GDP figures for the US are expected to show slower growth, with a consensus of 2.3% annualised growth compared to 2.6% in the last quarter of 2022. The US also reports quarterly core PCE figures, which should show a slowing pace of inflation. Recent PMI figures have been more positive, but attention is turning to the debt ceiling debate, which could potentially cause uncertainty in the markets.