The initial estimate of Q1 US growth was well more than nearly anyone expected. The details were underwhelming as the consumption was halved and the GDP deflator was halved. Final private domestic sales, which strips away inventories, trade, and government spending rose 1.3%, the least more than five years.
Yet, like the US GDP overstates the case, EMU may not be as weak as some data appears and disinflation forces not quite as strong. The service sectors in EMU members, including and especially Germany is notable. It hints of headwinds in industry and exports. The combination of the decline in the euro and the rise in oil prices will feed into higher measures of inflation going forward.
The dollar, I have suggested, has been driven by the US economic and monetary divergence. However, the greenback’s inability to make much headway on the back of the GDP surprise warns that the divergence meme has gone as far as it can in the near-term, and this means that dollar is likely entering a consolidative phase. Given market positioning, the consolidation probably means a softer greenback. In turn, this could set up a test on the areas that the dollar appeared to break out of last week. The Australian dollar and yen have moved back into the previous trading ranges. If the euro cannot retake $1.12 and sterling cannot get above $1.30, Momentum traders would likely see it as a failure and press them lower. The next important targets are $1.10 for the euro and the $1.2775 area for sterling.