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The broadest measure of the economy always rocks the markets, especially in the first release. Another quarter of weak growth is expected in the world’s largest economy. Here are the details for this all-important release, and 5 possible scenarios for EUR/USD, a pair busy in an “ugly contest”.

Published on July 29th, at 12:30.

Indicator Background

Gross Domestic Product is the widest measure of the economy, published in a low, quarterly frequency. There are two revisions to this upcoming first release, but in most cases, the changes are minor. The publication on Friday as the last significant event of the week, also adds to the importance.

Q4 of 2010 saw meaningful growth in the US: 3.1% (annualized). This was seen in significant gains in employment in Q1 of 2011, but GDP growth was already much weaker: 1.9%. Such weak growth means that the economy is almost stagnating – this isn’t enough to create many jobs.

In the second quarter of 2011, the situation wasn’t much better. Employment indicators such as the Non-Farm Payrolls, and also manufacturing and services indicators, showed limited growth.

This makes expectations very modest now: only 1.6% growth in Q2. Low expectations can turn into a positive surprise rather easily, but if even these low expectations aren’t met, the dollar awaits a sell off.

Sentiment and technical levels

The debt crisis in Europe didn’t go anywhere. It just took a break after the European summit. But now, old and new fears are fully back. In the US, the situation isn’t much better. At the time of writing, the uncertainty around raising the debt ceiling remain. While many solutions are explored, even a delay in the “drop dead date” of August 2nd probably won’t provide the necessary rally for the greenback. So, both currencies are locked in an “ugly contest” for now and the sentiment is balanced.

Technical levels from top to bottom: 1.4882, 1.4775, 1.47, 1.4650, 1.4550, 1.4450, 1.4375, 1.4325, 1.4282, 1.42, 1.4160 and 1.41.

5 Scenarios

  1. Within expectations: +1.5% to +1.9%: No surprises and a similar outcome as Q1’s figure means that the pair will shake in both directions, but will likely stay within range.
  2. Above expectations: +2% to +2.6%: Better than expected growth can send EUR/USD lower, with a nice chance of breaking support.
  3. Well above expectations: +2.7% or more: A return to meaningful growth doesn’t seem likely. Such a huge surprise can send the pair below two resistance levels, and providing long term hope.
  4. Below expectations: +1% to +1.4%: Going under the low expectations cannot be ruled out. This will probably lift euro/dollar higher, above resistance.
  5. Well below expectations: +0.9% or lower. This virtually nonexistent growth and fears of a double dip recession will raise the chances of QE3 and will send the pair higher, with a break of two levels likely.
For more on EUR/USD, see the euro to dollar forecast.