Could US GDP trigger dollar rally ahead of a busy week?

It is going to be an extremely busy week for the economic calendar next week as we head into a new a month. Key data from China, Eurozone, UK and US will dominate the agenda, not to mention New Zealand or Canada. In addition, there will be two major central bank policy decisions from the Bank of England and the Reserve Bank of Australia. On top of all this, there will be more corporate earnings to look forward, for example from Apple and HSBC. So, there will be something for everyone next week.

Today, there is the small matter of US GDP to consider. The world’s largest economy is expected to have expanded in the second quarter by an annualized rate of 2.5% compared to 1.4% in Q1. Given the recent US data weakness, there is a good possibility that GDP may also disappoint expectations. However, will it necessarily lead to a dollar sell-off? I think the markets will be content with a very small miss. BUT if it is a significant miss, then dollar will likely head lower.

USD/JPY could turn higher, US data permitting

As I have mentioned in recent days, if the dollar were to make a recovery, its best bet will be against her weaker rivals such as the Swiss franc and possibly Japanese yen given the still-dovish SNB and BOJ. The USD/CHF has already moved sharply higher in recent days and now it could be the USD/JPY’s turn. A potential clean break above the 111.85-112.15 resistance area could trigger the rally. This area has been a sturdy support zone in the past and is now acting as resistance. It is likely that liquidity is resisting above this area: buy stops from the existing sellers and those from potential buyers. If the cluster of stop orders get triggered here later on today or early next week then the USD/JPY could head towards the 114s or 115s next.

However if key support in the 110.35-110.80 area breaks then all bets would be off for the bulls, at least in the short-term anyway. In this event, a return to the bottom of the old range would then become likely. However this is not our base case.

While the USD/JPY is stuck within the abovementioned technical areas, I don’t have a strong view in terms of direction. But my gut feeling tells me the next move is likely to be higher. The good news is we will soon find out which group of market participants are in control as price will inevitably either break support or resistance. Until then, traders may take it from one level to the next, especially given the upcoming releases of high-impact macro data.