US GDP Hurts ADP Cheers NFP Won 8217 t Matter

Today’s surprise 0.1% contraction in US Q4 GDP challenges the notion of an exit strategy from the +85 bn in monthly asset purchases and keeps the Fed firmly in the path of pursuing its 6.5% unemployment target, the implications of which are a weaker US dollar.

Neither a fresh five-year low in US jobless claims tomorrow or a surprise +200K print in Jan NFP is expected to remove the Fed doves from maintaining +85 bn in monthly purchases in the first three month of the year.

The GDP report shifts markets’ attention further to the immediacy of the US debt ceiling, which takes precedence over the Fed’s language/guidance on for 6-12 month’s horizon. Five-year lows in jobless claims and five-year highs in equity indices support the case for reconsidering QE3 duration, but periodic disappointments such as today’s GDP figure and yesterday’s 15-month lows in US consumer confidence will give the Fed doves the upper hand over the hawks.

Euro overvalued?
We have been here before. Each time the euro rises 10% from its cycle low, Eurozone politicians (and some ECB members) rush into making claims of euro being overvalued with the intention of stabilizing the threat to competitiveness. Such claims are misplaced due to the fact that: ECB is the only major central bank engaged in actual tightening, with its balance sheet shrinking[ 5% since June vs. +5%, +15% and +9% for the Fed, BoE and BoJ respectively, relative policy flows are further boosting euro momentum. 32-month highs in German business sentiment, fully subscribed bond auctions from Italy and Spain and are also a manifestation of robust market metrics.

US 10-year yields have quickly rebounded from an initial five-bp drop following the GDP release, now treading just above 2.01%. Bond traders are especially concerned with the more updated jobs figures on Thursday and Friday, following today’s release of January ADP hitting an 11-month high at 192K. Rather than failing their two-year trendline resistance, we expect yields to extend gains towards their next upside target of 2.38%.

Our EUR/USD target of $1.35 initially issued in September here has been achieved. We revised our forecast back in December to $1.37 here (before 1.35 was attained). The arguments for our relentless insistence of further euro gains was partly based on anticipated collective central bank asset purchases and our position against expecting any ECB rate cuts. The technical arguments were also laid out throughout based on secular FX recovery and classic bullish formations. As the today’s GDP figures maintain the Fed entrenched in its easing route, the relative tightening from the ECB will likely induce momentum towards $1.38, followed by 1.43 by end of Q1.

The break of the 200-week moving average for the first time since October 2011 will not go unnoticed by any blackbox trader or option dealer.

Gold once again finds fundamental reasons to gain support at the technically crucial foundation 1640s, which is a confluence of the 100-WMA and the four-year trendline support. Gold may never run out of “fundamental factors” courtesy of growing asset purchases from the world’s four largest central banks. Nonetheless, technical dynamics are no longer as robust as they were last year. The more challenging part is increasingly about capturing (and timing) the upside. Considering the three-month trendline resistance near $1700, we find the improving momentum to carry sufficient momentum in breaking above the trendline, but question marks are now appearing near 1730.