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Huge USD Risk Events In Focus US Q1 GDP & FOMC Rate Decision



1) US Q1 GDP DATA


At 1330BST/0830EDT, we get US GDP data for the first quarter of 2020. The US economy is seen shrinking at a Q/Q rate of 4% in Q1 2020. 


Despite the drag of the US/China trade war, the US economy exited 2019 on a strong footing, growing at 2.1% in Q4 of 2019. This strong pace of growth was largely maintained in the initial stages of Q1 2020, but the Covid-19 pandemic has changed everything. 


By the end of March, most of the US economy had gone into lockdown to contain the spread of the virus. As we now know, roughly 26mln people (some 16% of the US workforce) has been made unemployed as a result of lockdowns, but much of this happened in April. 


As a result, Q1 data is therefore likely to show a much more modest decline in GDP than will Q2. In other words, the worst (in data terms) is still ahead of us. 


If the data comes out worse than expected, this could be a blow for risk sentiment, which could provide some support for safe haven USD. 





2) FOMC RATE DECISION 


At 1900BST/1200EDT, the US FOMC will release its latest interest rate and monetary policy decision. Markets expect interest rates to be left on hold at historic lows of 0.0%-0.025%, the Fed having said it does not favour going into negative territory. 


Much of the focus of the meeting will be on how the FOMC takes stock of the emergency measures it has already taken since the onset of the Covid-19 economic crisis - i.e. the Fed will be evaluating the performance of its various new liquidity and lending programmes. 


There is some debate as to whether Fed Chair Powell will want to provide more detailed guidance on how long rates will be remaining at current levels. At the moment, Fed language is that rates are to remain at these levels until the Fed is "confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals."


Moreover, some think there is a chance that the FOMC could unveil (or move towards) a new Yield Curve Control regime (where the Fed would target yields at a certain level in short maturity US government debt). There will be no updated economic forecasts or dot plot released at this meeting.


With little by way of changes expected from the Fed at this meeting, the market reaction is likely to be more muted than usual. Traders will be keen to “read between the lines” when parsing through the statement (released at 1900BST/1200EDT with the rate decision) and when Powell delivers his press conference (30 minutes later).


However, should the Fed go further than expected on issues such as forward guidance and YCC, there is a risk that we might see a dovish reaction; i.e. stocks, bonds, crude, risk FX higher, USD lower. Conversely, almost no one expects the Fed to come across as hawkish; given just how aggressively dovish they have been over the past months.



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