EUR/USD

The U.S. economy slowed less than expected in the fourth quarter amid solid consumer and business spending, leaving 2018 growth just shy of the Trump administration's 3% annual target.

U.S. GDP increased at a 2.6% annualized rate in the fourth quarter after expanding at a 3.4% pace in the July-September period. The fourth-quarter GDP report was delayed by a 35-day partial shutdown of the government that ended on January 25, which affected the collection and processing of economic data.

The Commerce Department said while it could not quantify the full effects of the shutdown, it estimated the partial closure had subtracted about one-tenth of a percentage point from fourth-quarter GDP growth through "a reduction in the labor services supplied by federal employees and reduction in intermediate purchases of goods and services by nondefense agencies."

Growth in consumer spending increased at a still strong 2.8% rate in the fourth quarter. Consumer spending grew at a robust 3.5% rate in the third quarter.

Trade tensions with China could constrain the economy for a while. U.S. Trade Representative Robert Lighthizer told lawmakers on Wednesday that Washington's issues with China were "too serious" to be resolved with promises from Beijing to buy more American goods and a threat of higher tariffs could loom over trade with China for years.

The trade dispute has combined with a strong dollar and weakening global demand to restrain export growth. It also led cautious businesses to hoard imports, causing the trade deficit to widen.

The trade shortfall subtracted 0.22 percentage point from fourth-quarter GDP growth after slicing off 2 percentage points in the July-September period. With consumer spending slowing, some of the imports probably ended up in warehouses.

This accelerated inventory accumulation, which offset some of the drag on GDP growth from the trade deficit.

Inventories increased at a USD 97.1 billion rate in the fourth quarter after rising at an USD 89.8 billion pace in the July-September quarter. Inventory investment added 0.13 percentage point to GDP growth last quarter after contributing 2.33 percentage points in the prior period.

Business spending on equipment accelerated in the fourth quarter from the prior period, growing at a 6.7% rate. It had slowed since the first quarter of 2018.

The market had forecast GDP rising at a 2.3% rate in the fourth quarter. Despite the economy's strong performance in the last quarter and in 2018, there are indications activity is softening, with most manufacturing measures weakening in January and February.

The labor market is also showing signs of cooling, with a report from the Labor Department on Thursday showing the number of Americans drawing unemployment benefits rising to a 10-month high in the week ended February 16.

The dollar reduced losses versus the euro on Thursday, after U.S. data showed that economic growth was stronger than expected in the fourth quarter. Prior to the data, the dollar index, a measure of the greenback's value against six major currencies, had fallen to a three-week trough. EUR/USD's upside bias is still in play as the market remains propped by the 30-day moving average, which is currently at 1.1364. Bulls now need to force a daily close above the 1.1403 Fibonacci level, which is a 50% retrace of the 1.1570 to 1.1235 (January to February) fall. The next resistance level is 1.1442 (61.8% Fibo).

Rising risks and recent soft data should not prevent solid growth for the U.S. economy this year, but the Federal Reserve will remain "patient" in deciding on further interest rate hikes, Fed Chairman Jerome Powell said.

In prepared testimony released in advance of a hearing before the U.S. Senate Banking Committee, Powell reaffirmed the policy shift made by the U.S. central bank in January, citing "crosscurrents and conflicting signals" that weakened the case for further rate increases and made an otherwise positive outlook less certain.

"We view current economic conditions as healthy and the economic outlook as favorable," Powell said in the prepared statement, projecting that the U.S. economy in 2019 will "expand at a solid pace, albeit somewhat slower than in 2018, and the job market to remain strong."

The Fed now estimates that GDP grew by slightly less than 3% in 2018. The U.S. government is scheduled on Thursday to release its fourth-quarter GDP report, which was delayed by the recent partial U.S. government shutdown.

"Some data have softened but still point to spending gains this quarter," Powell said, highlighting the sometimes contradictory set of information the Fed grappled with at year's end.

That included a global market sell-off, fears of a widening U.S.-China trade war, slow growth among major U.S. trading partners, and worries that the Fed itself would raise rates more aggressively than conditions warranted.

Recent retail sales data were disappointing and some Fed officials have worried that inflation could slip, though Powell said the central bank still feels the pace of price increases will remain close to its 2% target after accounting for the temporary influence of lower oil prices.

The recent 35-day government shutdown added to those U.S. growth concerns, though Powell said it is expected to have had a "fairly modest" impact on the overall economy that will "largely unwind" in the coming weeks as workers, for example, receive back pay for missed time.

Powell will also appear before the House Financial Services Committee on Wednesday. The two hearings are part of the semi-annual rounds of testimony the Fed chief delivers to Congress each year.

It will be Powell's first since Democrats won control of the House of Representatives in the November elections, and he comes with much to discuss.

After raising rates four times in 2018, and anticipating further hikes in 2019, the Fed in January switched to a new "patient" stance as concerns about the global economy took root, and global markets voiced doubts about the U.S. recovery.

In addition, the Fed is now debating when and how to stop the monthly rundown of its balance sheet, an issue that has been a priority particularly for Republican lawmakers who generally want the Fed to have a smaller financial footprint. Recent comments by Fed officials have pointed to the likely need for a larger balance sheet and a willingness to use it more regularly to fight future economic downturns.

EUR/USD trades circa the 30-day moving average, which is now at 1.1363, a daily close above which will strengthen the underlying bullish outlook for the daily cloud base at 1.1393. The 1.1402 Fibo, a 50% retrace of the 1.1570 to 1.1234 (January to February) drop, is also in focus. We remain long at 1.1320 in anticipation for stronger gains through the above-mentioned 1.1402 Fibo level.

The Federal Reserve said Friday that in light of a slowing global economy and last year's financial market turmoil, the central bank intends to remain "patient" in determining when to make future changes in its benchmark interest rate.

The Fed's semi-annual report to Congress on monetary policy stood in contrast to its last report in July when it signaled that it was on track to keep raising rates at a gradual pace over the next two years.

The new report cites a range of risks to the economy that have developed over the last six months, as well as continued muted inflation as reasons to slow further hikes.

At its last meeting in January, the Fed left rates unchanged at a level of 2.25% to 2.5% and signaled a major pivot away from steadily raising rates by declaring that it intended to be "patient" in deciding when to raise rates again.

Various Fed officials including Fed Chairman Jerome Powell have emphasized that change in speeches since the January 29-30 meeting. Powell will testify on the Fed's Monetary Policy report before Senate and House committees next Tuesday and Wednesday.

The European Central Bank would be ready to change its monetary policy guidance if a current downturn drags on for longer than expected, ECB policymaker Francois Villeroy de Galhau said on Friday.

Villeroy said in a speech in Lisbon that temporary factors, such as a contraction in German manufacturing output and protests in France, were weighing on growth.

The ECB has said it expects to keep interest rates at current record lows at least through the summer, although that long-standing guidance is increasingly out of sync with market expectations since euro zone growth has slowed.

Against that backdrop, policymakers have so far steered clear of putting out signals on interest rates beyond the term of current ECB chief, Mario Draghi, who is due to leave office on October 31.

While hesitating on the rates outlook, the ECB is preparing the ground for more multi-year, cheap loans for banks to keep credit flowing amid weaker growth. This would also help lenders in Italy and other southern European countries avoid a funding cliff edge when the previous TLRTO starts maturing next year.

Villeroy said the ECB could not tailor policy for specific countries or banks and should "look at the whole spectrum of possible tools, including various forms of LTRO, to decide about the recalibration of conditions and maturities." He also said the ECB should be careful if it keeps negative interest rates for longer than planned, over concerns that the impact on banks' profits could weigh on the effectiveness of its monetary policy. "If we had to use negative rates for a longer period than expected, we should study pragmatically how to contain their possible adverse effects on the bank transmission of our monetary policy," Villeroy said.

EUR/USD bulls remain in control despite the failure to register a daily close above the 1.1362 Fibo, a 38.2% retrace of the 1.1570 to 1.1234 (January to February) drop, despite the break above. Scope is for an eventual break above the 30-day moving average, which is currently at 1.1369, a close above which would accelerate. We are long at 1.1320 in anticipation for gains.

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