US Q2 GDP shrinks by 0.9%: Dollar slides in volatile trade

USD/JPY Plunges, Yields Tumble; Fed Hikes 0.75bp, TGIF!

Summary: It was all happening in FX markets in an action-packed 24 hours. After the Federal Reserve raised interest rates by 0.75 basis points as expected, US Q2 GDP contracted by 0.9% following a downward revised -1.6% print in Q1. Technically, the world’s largest economy entered into a recession. The benchmark US 10-year treasury bond yield tumbled 10 basis points to 2.67%.  In another roller coaster, volatile ride, the Greenback rallied initially in Europe after the Federal Reserve hiked rates. After the release of the GDP report, which came later in the US trading day, the Dollar did a U-turn and fell. The Dollar Index (DXY), which measures the value of the Greenback against a basket of 6 major currencies slid 0.27% to close 106.15 (106.25 yesterday). Against the yield sensitive Japanese Yen, the US Dollar (USD/JPY) plunged 1.37% to 134.24 at the New York close from 135.30 yesterday. Sterling (GBP/USD) rallied 0.15% to 1.2179 (1.2167) while the Euro (EUR/USD) finished little changed at 1.0194 from 1.0204. The Australian Dollar (AUD/USD) finished flat at 0.6989 after trading to an overnight and 6-week high at 0.7014. The Greenback was mostly lower against the Asian and Emerging Market currencies. USD/THB (Dollar-Thai Baht) slid 0.68% to 36.41 (36.67) while USD/CNH (Dollar-Offshore Chinese Yuan) dipped to 6.7425 from 6.7490.

Wall Street stocks rallied after Fed Chair Jerome Powell said that while another 75 bp hike in September was possible, any decision would depend on upcoming economic data. The DOW finished at 32,600 (32,170) while the S&P 500 was last at 4,102 from 4,017 yesterday.

Other data released yesterday saw Australia’s June Retail Sales rise 0.2%, lower than the previous 0.9%, and missing estimates at 0.5%. Germany’s July Preliminary CPI rose on an annual basis to 8.5%, beating median expectations for an 8.1% increase. US Q2 Core Personal Consumption Expenditures dipped to 4.4% from a previous 5.2%, and lower than estimates at 4.5%. US Weekly Unemployment Claims rose to 256,000 against forecasts at 253,000 and a previous upward revised 261,000.

• USD/JPY – The yield sensitive Japanese Yen outperformed FX after US bond yields tumbled. The Greenback closed at 134.25 Yen, 1.37% lower than its open yesterday at 135.30. Trading was volatile with the overnight high recorded at 136.42. Japan’s 10-year JGB yield was flat at 0.19%, narrowing the differential with its US counterpart.
• EUR/USD – The Euro found some respite from broad-based US Dollar selling, finishing modestly lower at 1.0194 (1.0204). In volatile trade, the overnight low recorded was at 1.0114 while the overnight high traded was at 1.0243. Against the other FX pairs, the Euro settled lower.
• AUD/USD – The Aussie Battler managed to trade above the 0.70 cent mark for the first time in 6 weeks, hitting an overnight high at 0.7014 before easing at the close to 0.6988. Trading was no less volatile in this currency pair. AUD/USD closed at 0.6989, from 0.6985 yesterday.
• GBP/USD – Sterling rallied against the Greenback to finish at 1.2179 from 1.2167 yesterday. The weaker than expected US GDP number buoyed the British currency. Traders were looking ahead to the Bank of England’s interest rate meeting next week (4 August). The British central bank is likely to continue its tightening cycle. Overnight high traded was at 1.2191. The low recorded was at 1.2103. Like the other FX pairs, trading was choppy.

On the Lookout: As we come to the close of a volatile week for markets and the last trading day for the month, we can expect more of the same ahead. Today’s calendar also sees an economic data dump. Japan kicks off Asia today with a plethora of data beginning with: Tokyo Core CPI (y/y f/c 2.2% from previous 2.1%), Japan’s June Unemployment Rate (f/c 2.5% from 2.6%), Japanese June Preliminary Industrial Production (m/m f/c 3.7% from -7.5%; y/y no f/c, previous was -4.7% - FX Street), Japanese June Retail Trade (m/m f/c 0.8% from 0.6%; y/y f/c 2.8% from 3.6% - FX Street). Australia follows with its Private Sector Credit for June (m/m f/c 0.8% from 0.8%; y/y no f/c, previous was 9% - FX Street), Australia Q2 PPI (q/q f/c 0.8% from 1.6%; y/y f/c 3.8% from 4.9% - FX Street). Japan reports its July Consumer Confidence Index (f/c 33 from previous 32.1 – FX Street), Japanese June Housing Starts (y/y f/c -1.2% from -4.3% - FX Street). France starts off European data with its Preliminary Q2 GDP report (f/c 0.2% from -0.2% - FX Street), Germany releases its Import Price Index for June (m/m f/c 0.8% from 0.9%; y/y f/c 29.9% from 30.6% - FX Street). Switzerland follows with its July KOF Leading Indicator (f/c 95.2 from 96.9 – FX Street), Spain releases its Estimated Q2 GDP (q/q f/c 0.4% from 0.2%; y/y f/c 5.55 from 6.3% - FX Street), Germany follows with its July Unemployment Rate (f/c 5.4% from 5.3%), German Q2 GDP (q/q f/c 0.1% from 0.2%; y/y f/c 1.7% from 3.8% - FX Street). The UK follows with its June Mortgage Approvals (f/c 65k from 66.163k), UK Net Lending to Individuals (f/c GBP 7.2 billion from GBP 8.3 billion – Forex Factory). The Eurozone follows next with its Eurozone July Preliminary CPI Flash Estimate (y/y f/c 8.6% from 8.6% - FX Street), Eurozone July Core CPI Flash Estimate (f/c 3.8% from 3.7% - FX Street). The US rounds up today’s calendar with its Core Personal Consumption Expenditures Price Index for June (m/m f/c 0.5% from 0.3%, y/y f/c 4.7% from 4.7% - FX Street), US June Personal Income (m/m f/c 0.5% from 0.5%), US June Personal Spending (f/c 0.9% from 0.2%- FX Street), US Chicago July Purchasing Managers Index (f/c 55 from 56), US University of Michigan July Consumer Sentiment Index (f/c 51.1 from 51.1 – FX Street). Canada releases its May GDP (m/m f/c -0.2% from previous 0.3%). Whew!

Trading Perspective: Welcome to the last trading day of the week, and yes, Thank God its Friday. We can expect another volatile day in FX markets with today’s data dump. Watch for rhetoric from various treasury and central bank officials who are likely to liven up the action. Liquidity will be at a premium as we head into the American afternoon today.

The Dollar Index has eased off its highs this week, from 107.28 on Wednesday to 106.15 today. The fall in the US Q2 GDP will continue to weigh on the Greenback. While the Dollar managed to rally after the Fed rate hike, it was short-lived. The US economy contracted again in the second quarter after a 1.6% contraction in Q1 which meets the standard definition of a recession. The softening of the US economy due to tighter monetary policy was acknowledged by Fed Chair Jerome Powell. This is like a red flag to the Dollar bears who have sharpened their claws. The “R” word will also weigh heavily on the Greenback. That said, economic data today will put the focus on Europe and the rest of the world. If the US is in recession, where is the rest of the world going? It will not be one way traffic south for the US Dollar, so folks, let’s get ready to rumble.

Keep those tin helmets on. It’s just another day for you and me in FX land.

• EUR/USD – The Euro’s rebound against the US Dollar took it to a high at 1.0234 overnight from its opening of 1.0205 yesterday. The EUR/USD pair closed at 1.0194. Just two weeks ago, the Euro traded under parity (0.9952) briefly. For today, immediate resistance lies at 1.0210 followed by 1.0240. Immediate support is fount at 1.0160, 1.0130 and 1.0100. Look for consolidation today likely range 1.0120-1.0220. Prefer to sell rallies.
• USD/JPY – Against the Japanese Yen, the Greenback plunged 1.37% to finish at 134.24 against yesterday’s 135.30. Overnight low traded was at 134.20. In early Asia, USD/JPY has edged up to 134.50. Immediate resistance is found at 134.70, 135.00 and 135.30. Immediate support lies at 134.00, 133.70 and 133.40. Look for another roller coaster ride in this currency pair. Likely range 134.00-135.50. Watch the US bond yields.

(Source: Finlogix.com)

• AUD/USD – The Australian Dollar managed to close just under the 0.70 cent psychological resistance level. Only just, at 0.6989, little changed from yesterdays open. Overnight high traded was at 0.7014. For today, look for immediate resistance at 0.7010 followed by 0.7040 and 0.7070. Immediate support can be found at 0.6960, 0.6930 and 0.6900. Look for another volatile session in this currency pair, likely range 0.6950-0.7050.
• GBP/USD – Sterling rallied against the broadly based weaker Greenback to 1.2179 against its 1.2167 open yesterday. Overnight high traded was at 1.2191. For today, look for immediate resistance at 1.2200 followed by 1.2230 and 1.2260. On the downside, immediate support can be found at 1.2140, 1.2110 and 1.2080. The UK releases its Mortgage Approvals and Net Lending to Individuals data today. With the Bank of England scheduled to meet on interest rates next week (4 August), expect more volatility in this currency pair. Likely range for today, 1.2100-1.2250.

Have a good trading day and Friday ahead all. Top weekend too.