US GDP Falls Below Low Expectations – Dollar Recovery

The initial release of GDP for the first quarter of 2011 shows very weak growth of 1.8% at an annual rate. Early expectations stood on 1.9%. In addition, the weekly jobless claims figure made a leap to 429K, back to the high range after a few good months. The recovery of the dollar after Bernanke’s blow now comes to a halt – the greenback is losing ground.

EUR/USD now rises back above 1.48, after losing it earlier in the day. GBP/USD rises to 1.6665, USD/JPY falls to 81.55 and other currencies also gains against the dollar.

Economists estimate that a growth rate of at least 2.5% is necessary in order to squeeze the level of unemployment, which lags growth anyway. A growth rate of 1.8% is too weak.

Higher oil prices were the main reason that expectations were low this time. The fourth quarter of 2010 was good, with a growth rate of 3.1%. The growth in Q4 could have been stronger, if it weren’t for a big cut in inventories. A build up of those inventories was expected following the numbers for Q4, but growth was slower than expected.

EUR/USD traded just under 1.48 before the release, dipping below this support line. It conquered the 1.47 line around the press conference of Ben Bernanke. When the dust settled and the Asian session began, the dollar saw a huge sell off – EUR/USD peaked at 1.4882, the Aussie reached new records and even the British pound reached 1.67.

EUR/USD levels below are 1.47, 1.4650 and 1.4580. Above, we have 1.4915, 1.5020 and 1.5144.  For more levels and events regarding the Euro, see the EUR/USD forecast.

Bernanke, which also said that growth will probably be weak in the first quarter (placing himself together with market expectations), also lowered the GDP forecasts for the rest of the year.

The main headline from Bernanke was QE2 Lite – a reinvesting of maturing assets after QE2 ends at the end of June. This was dollar bearish.

In other US the weekly unemployment claims jumped to 429K, far worse than early expectations for a drop to 392K. Jobless claims usually get more attention. This publication serves as an indicator for the Non-Farm Payrolls, expected next week. This time, they were overshadowed by the GDP release, but they sure add to the heavy weight on the dollar.

Did Bernanke know about these bad figures?