Slight Bounce by the Dollar Despite Weaker GDP

It’s been another active week so far for forex markets after American advance GDP came in significantly weaker than expected. There has been less focus on tariffs in the last few days amid a generally positive earnings season and in the runup to the NFP on 2 May. This article summarises recent events affecting the US dollar, especially GDP, then looks briefly at the charts of EURUSD and GBPUSD.

There was an unexpected contraction by the American economy last quarter according to advance data released on 30 April:

The decline of 0.3% came against the consensus of positive 0.3%, which is quite a large divergence. To some extent, it’s not as surprising as it looks: with DOGE actively cutting, it was obvious that governmental spending would fall, and businesses would also obviously try to mitigate upcoming tariffs by stockpiling, increasing total imports. Growth in consumer spending slowed to 1.8%, the lowest for about 18 months but not necessarily a cause for concern.

The upcoming NFP on Friday 2 May has a consensus of around 130,000, significantly weaker than last month’s surprisingly positive 228,000. Neither advance GDP nor the NFP in themselves are likely to have much impact on monetary policy in the short term, but the overall tone of releases might impact the trajectory of rates from June onwards. The majority of participants according to CME FedWatch expects at least four single cuts from the Fed by the end of the year.

Headwinds for EUR/USD as Trade Tension Declines

Euro-dollar retreated further on 1 May in thin trading to retest $1.13. Trade wars are less in focus now with the rising possibility of deals between the USA and India, Japan and South Korea among others. Although American advance GDP for the first quarter was disappointing at negative 0.3%, the generally positive reaction by the dollar might suggest positive sentiment and that participants had been expecting a worse result. Flash GDP for the eurozone was better than expected on 30 April.

$1.13 remains an important technical reference. A break clearly below there might open the way to $1.11 and possibly lower in the medium term, especially if sentiment and the American job report support. Conversely, a bounce from here would probably mean a retest of the latest highs around $1.156 sooner or later. Overall, euro-dollar’s performance since the end of February has been very strong, so it’d be possible to see the price consolidating for a while before making clear new highs if the uptrend does indeed continue. Apart from 2 May’s NFP, next week’s press conference from the Fed is critical.

Possible Short-term Support for Cable Around $1.33

Cable remained close to three-year highs on 1 May after completing a very strong monthly performance in April. Significantly lower political instability in the UK and a generally weak US dollar amid uncertainty over tariffs both helped the pound to gain. Broadly speaking, the pound is less vulnerable to current political and trade issues than many other currencies given that the USA has a fairly large trade surplus with the UK in terms of goods and the British government seems very eager to placate the American administration.

Highs around $1.343 from late last month coincide neatly with September 2024’s peak, so it might be quite difficult for the price to break out above there unless there’s a strong fundamental driver, whether from monetary policy or something else. The main dynamic support is the 50 SMA from Bands which triggered a bounce around 7 April, but in the short term the 20 SMA is also in view as a possible support.

The maturity of the uptrend makes it questionable whether there’ll be a new high in the next few days, especially with important releases coming up next week. Volatility will probably increase significantly around 7-8 May because the Fed and BoE will meet on consecutive days. The probability of a hold by the Fed has been very high for some time but the BoE is expected to call for a single cut.

This article was submitted by Michael Stark, an analyst at Exness.

The opinions in this article are personal to the writer; they do not represent those of Exness. This is not a recommendation to trade.