"It just furthers the narrative that the first quarter was weak, and the jury is still out whether it was a one off or we just lost some momentum. I think it was weather-related, West Coast port related. I think we will bounce back in the second quarter, but the Fed is going to be skeptical of that," said Stephen Stanley, chief economist at Amherst Pierpont Securities.
Stanley expected flat growth and was the most negative on the Street in his first quarter GDP forecast, but he now expects growth of about 3 to 3.5 percent in the second and third quarters.
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Marc Chandler, chief currency strategist at Brown Brothers Harriman, said even though the dollar is getting crushed, the markets should still be guided by policy divergence. European easing for instance should weigh on the euro and support the dollar rally, as the Fed moves toward rate hikes.
"(The euro) is making new highs for this correction. I'm still reluctant to say that the dollar bull market has ended," Chandler said. "I think this is still corrective in nature and I think a lot of it will hinge on the Federal Reserve today, but more importantly next week's jobs data."
The Fed has made it clear it is data dependent and will decide on rate hikes as it sees more figures. Expectations for the first hike are as early as September but definitely by December. Weak March jobs data had made some traders expect the first hike later rather than sooner, and now each jobs report is an important key to Fed hiking.
Chandler said he thinks the next target for the euro could be 112.5 "I won't be too concerned until we get to 112.5. I think it's important that it's macro economics that shape the dollar, not the dollar shaping macro economics."
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First quarter GDP grew just 0.2 percent, well below the 1 percent expected by economists. Treasury yields, however, continued to hold gains despite the fact that weak data is usually a bullish sign, meaning yields move lower. Stocks were already negative and futures gave up more gains in a somewhat delayed reaction to the 8:30 a.m. EDT report on GDP. Stocks continued to be slightly weaker on the day.
"The Fed's been arguing the headwinds in the economy are transitory and there's nothing in the data to suggest it's not transitory. The rise in commodities prices reinforces it," Chandler said.
Chandler also pointed to the bond market, where the 2-year yield remained flat, even though the long end rose. The short end is more predictive of Fed hiking.
"To me, the most important thing here is the sharp backup of U.S. interest rates and (the dollar) is not giving the support because you have a huge selloff in European bonds, which is even bigger," he said.