US GDP in Focus as Fed Slashes Outlook

While the Fed awaits further clarity, markets remain nervous about the prospects of economic growth, with investors looking forward to data that could reduce some of the uncertainty.

Maintaining a Cautious Stance

The recent FOMC decision encompassed several important pieces, and as the headlines shift focus from interest rates, economic projections have gained more attention. Amid the uncertainty surrounding economic policies and the potential ramifications of tariffs on prices and the economy as a whole, the Fed appears to be taking a step aside to let events unfold before taking further action. This cautious approach is mirrored among investors, who have taken a more risk-averse profile in recent weeks. The Fed's recent downward revision of economic growth forecasts for this year to 1.7% from 2.1% previously, coupled with inflation remaining above target, also slots into wider concerns about the prospects of economic growth.

Thursday's release of the final US Q4 GDP reading is expected to confirm the slowdown to an annual rate of 2.3%, down from 3.1% seen in the third quarter. The US economy has been on a moderating pattern for nearly six months, and there are signs that the recent tariff escalation is simply accelerating an already downward trend. However, the Fed's GDPNow tracker has started to trend upwards, albeit still pointing to a negative result of -1.8% for the first quarter of the year, an improvement from the -2.8% projection previously.

Potential for Recovery?

Safe-haven flows have pushed down Treasury yields, effectively lowering borrowing costs, which is akin to a rate cut. However, with the government looking to reduce costs wherever possible, there is another component of the GDP calculation that weighs on the downside. The weakening of the dollar amid rising yields in Europe due to prospects of increased government spending is another event that has had an impact on the dollar and the EURUSD. However, this phenomenon might be reversing as the White House appears to be moderating its tariff stance following the stock market dump this year and the rising potential for stagflation. The reports of more limited tariffs, however, introduce a new area of uncertainty, as they represent a new form of implementing tariffs.

While markets reveal some uncertainty, they do not show a conviction of a downturn. Monday's PMI figures surpassed expectations, suggesting that the prevailing doom and gloom might be somewhat exaggerated. Next up on Friday is the release of the Fed's preferred measure of inflation, the PCE index. The headline rate is expected to rise to 2.7% from 2.5% previously, while core is projected to increase to a similar level of 2.8% from 2.6%. This could dampen hopes for a Fed rate cut.

Markets are pricing in two additional rate cuts from the Fed this year, which could be upended if inflation remains persistently high. Unless there is a definitive shift in the data to reassure investors that the US economy is on an upward trajectory, the safe-haven move could remain in effect, providing support for the EURUSD even if the European economy is not perceived as being on a solid footing.

EURUSD Double Top Signals C&H Pattern

A potential double top formation at 1.10 on EURUSD suggests the development of the handle of a potential cup-and-handle (H&S) pattern. If 1.0825 or the 1.080 handle holds firm in case of further declines, the falling wedge pattern could offer a bounce to 1.0943 or even signal the completion of the handle. However, a breach of the 1.0760 support might invalidate the pattern and expose further support towards 1.065.

Source: SpreadEx / EURUSD

Key Takeaways

The Fed's cautious approach and downward revision of growth forecasts, coupled with persistent inflation concerns, have fuelled market nervousness about the US economic outlook. But while safe-haven flows have provided support for the EURUSD, the potential moderation of tariff policies introduces a new layer of uncertainty unless data convincingly signals an opposite trajectory.