The US economy added 1.9% in the fourth quarter, despite the increase in consumer spending, as the trade deficit continued to grow.
Consumer spending, which are the main driving force behind the US economy, for the quarter increased by 3%, against 2.5% previously announced.
However, the beneficial effect from the consumption was brought to naught by a slight increase in business investment and sluggish government spending. As a result, GDP remained unchanged from the preliminary indicator.
Stocks and the dollar expect Trump’s speech in the Congress
Investors took timeout before Donald Trump’s speech in the Congress, the oil made a pullback, and gold eased.
Shares of commodity producers slipped as the prospects for industrial metals darkened, while the shares of construction companies rose for the second day hoping that the new administration would increase spending on infrastructure. Treasury bonds strengthened after the downturn in the early part of the week, since the chances of a rate hike in March have increased.
“Bears” on the dollar are quite cautious, in case Trump fulfills his promises, and Yellen’s tone will become more “aggressive” this week, said Stephen Innes, senior currency trader at Oanda Corp.
Dallas FRB President Robert Kaplan said that the Fed is preferable to raise rates sooner rather than later, without paying too much attention to market expectations. Chances for a rate hike at the meeting on March 14-15 grew 50%, as shown by futures on the federal funds, compared to 34% five days ago.
Trump’s speech will be a turning point for the dollar
If Donald Trump’s speech before the Congress will have a few details, it can put an end to reflationary trades on the dollar.
This public address is likely to affect the Fed’s decision at the March meeting and to determine the performance of the dollar for the next quarter. Despite the slight strengthening of the dollar on Monday, a downward trend has been observed since January.
As Trump noted, the administration cannot work on a tax plan, not knowing the cost of health care, while the infrastructure costs are expected to be significant.
The dollar/yen pair slipped after these comments.
If the increase in costs is not scheduled until next year, the Federal Open Market Committee will be able to postpone the increase in interest rates.
Delaying fiscal stimulus and the Fed’s wait and see attitude are the main reasons for the end of reflationary trades, since they will lead to a reduction in inflation expectations, pushing the dollar down.
In recent years, the yen has been the best barometer for the dollar, and the Ichimoku cloud strategy suggests that the growth of the dollar has come to an end.