Talking Points:

First-Quarter Eurozone GDP Data Carries Downside Surprise Risk
Euro Gains Unlikely to Prove Lasting Even on Upbeat GDP Print
US Dollar May Rise as April’s US CPI Figures Boost Fed Outlook

The preliminary estimate of the first-quarter Eurozone GDP reading headlines the economic calendar in European trading hours. Output is expected to have added 0.4 percent in the three months through March, marking the strongest pace of expansion in three years. Economic data outcomes from the currency bloc have proven increasingly disappointing in recent months, with data from Citigroup revealing that realized results are now trailing analysts’ estimates by the largest margin in over 11 months. That warns of the possibility of a downside surprise.

Critically, even an upbeat print may not offer lasting support to the Euro. Economic data is significant to guiding exchange rates in that it helps investors establish the likely direction of future monetary policy. For the ECB, a statutory focus on price stability means that even a pickup in the rate of output growth will not necessarily discourage an expansion of stimulus efforts while stubborn disinflation remains a lingering concern. With that in mind, a near-term bounce on the back of a rosy GDP print is unlikely to see follow-through and we continue to look for EURUSD selling opportunities.

Later in the day, the spotlight turns to April’s US CPI report, which is due to show that the benchmark year-on-year inflation rate advanced to a nine-month high of 2 percent. US price growth readings have been outperforming consensus forecasts since January and overall economic news-flow began to firm relative to expectations in early April. On balance, that suggests analysts are underestimating the pace of inflation as well as the overall resilience of the US recovery, opening the door for an upside surprise.

Needless to say, such a result bodes well for the US Dollar against most of its leading counterparts. One possible exception could be the USDJPY: a pickup in speculation about US stimulus withdrawal may weigh on risk appetite, driving liquidation of Yen-funded carry trades and pushing the Japanese unit broadly higher. We continue to hold short GBPJPY.

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