Dollar weakens versus majors after US GDP growth more than doubles at 2.6 percent
The US economy grew at the fastest pace in three quarters, registering a 2.6 percent growth in the second quarter of 2017, compared to the year earlier even as the Q1’17 figures were revised lower to 1.2 percent from 1.4 percent. The Bureau for Economic Analysis announced the GDP numbers on Friday, 28th July and the advance Q2 estimates are in line with market expectations although the preliminary numbers are based on incomplete source data which is likely to be revised eventually. The GDP growth figures are the best since the third quarter of 2016 when the economy grew at an annual pace of 2.8 percent.
The major contributors to the economy in the second quarter are personal consumption expenditure (PCE) which rose 2.8 percent, investment in non- residential property, net trade and Central Government spending. Negatives include private investments in inventory, cars and trucks and residential property, rise in imports and lower spends by the State Governments.
On a QoQ basis, the US economy expanded at 0.65 percent and is among the best performing economies, rivalling some of the other major countries that have already announced second quarter GDP numbers. France’s economy grew at 0.5 percent in the second quarter, unchanged from Q1 while Sweden registered a 1.7 percent growth QoQ and Spain 0.9 percent. The only exception is UK which grew at a slow 0.3 percent in Q2 after 0.2 percent growth in the first quarter as rising inflation and Brexit concerns continued to persist. Q2 GDP numbers from the euro- zone are expected in mid-August.
Highlights of US GDP growth since 2016
Expectations from FOMC-
In spite of the strong economic performance this year, inflation is a major concern in the US as global energy prices continue to remain at multi- year lows. Consumer inflation has been steadily declining over the last 3- months with the June inflation data coming in at 1.6 percent, the lowest since October 2016. With the FOMC raising interest rates twice this year already and expectations of another hike, inflation could be one of the key determining factors.
In addition, the FOMC in its statement has hinted that it could start reducing its $4.5 trillion balance sheet, of which about $1.8 trillion comprises of mortgage backed securities which the Central Bank bought at the start of the financial crisis in 2008 and continued with its purchases until October 2014.
The Fed meeting in September could be a key determining factor not only because markets are looking for information that could determine how quickly the Central Bank intends to increase interest rates, but also because there could be more clarity on how the Fed plans to offload its assets. The September meeting will be very significant as it could define the near- term outlook for the US equity markets, which are currently at all- time peaks and the high interest paying junk bonds.
The US dollar remained in a tight range during the week versus most of the majors. However on Friday, the greenback gave up most of the gains to close near the top end of the trading range with the EURO, Sterling and the Japanese yen settling close to the week’s highs and key trading breakouts.
The outlook for the US currency remains bearish in the near- term and following are some key trading ideas for short- term FX traders.
EURUSD settled higher for the third successive week, closing at the highest level since the mid of January 2015. The near- term upside looks limited with key resistances at 1.1760- 1.1775 and a break of these levels could lead the pair to 1.1820- 1.1850. Look to short around these resistances with stops at 1.1900. Near- term supports for the single currency come in at 1.1630- 1.1650, offering long opportunities for traders.
GBPUSD ended Friday’s session at more than 10- month’s highs. The pair however settled near key resistances at 1.3150 for the second straight session. A close above the resistance and Sterling could rally to 1.3300. Key supports at 1.3000- 1.3050, break below which Sterling could head to 1.2800. Near term, trade the 1.3000- 1.3150 range with a SAR in case of a break- out in either direction.
USDJPY was seen trading in the 110.50- 112.00 range during the week before closing at 110.65 on Friday, the lowest since 14th June. If the pair takes out key supports at 110.50, there could be a 100- point sell off leading to the next support at 109.50. Resistances are placed at 112.00- 112.25 followed by 113.50- 114.00. For the week, look to trade the 110.50- 112.00 range with a stop of 25- 30 points and reverse positions in the event of a break- out.