Markets cheer Dovish Fed, US Q2 GDP expands 6.5%

A sense of positivity is certainly in the air today thanks to dovish comments by the Federal Reserve overnight, the US Senate voting to move ahead on the $1.2 trillion infrastructure plan and robust earnings in Europe.

Stocks on the continent were painted green this afternoon, having hit record highs earlier in the day amid the risk-on sentiment. US equity markets are also positive hitting fresh record highs as bulls take heart from Jerome Powell’s dovish remarks and the prospects of a breakthrough on the infrastructure bill.

Dollar humbled by Dovish Fed

“One man’s meat is another man’s poison” is a proverb that comes to mind when looking at the dollar’s recent selloff. While equity bulls were doing backflips and cartwheels after Jerome Powell said that rate increases were “a ways away”, this dealt a heavy blow to king dollar. In fact, the greenback has depreciated against every single G10 currency today with the Dollar Index (DXY) wobbling above 92.00 as of writing. With Powell highlighting that the job market still had “some ground to cover” before the Fed begins tapering, investors are likely to keep a very close eye on economic data. Given how this will drive taper discussions and rate hike expectations, we could be in for some bumpy months and increased dollar volatility.

US economy grows at 6.5% in Q2

Speaking of data, the US economy grew at a 6.5% annualised in the second quarter of 2021. This was higher than the revised 6.3% pace seen in the first quarter but well below market expectations of 8.5%. Despite the report falling short of forecasts, this was still the biggest jump in growth since the third quarter of 2020 when the economy sprung back to life. Details also showed that personal consumer spending rose at an annualised rate of 11.8% so the US consumer appears to be very much alive and kicking.

In other data releases, US initial jobless claims dropped by 24,000 to 400,000 last week as the economy continues to recover from the pandemic. With Powell’s recent comments around the job market and tapering, further signs of improving jobless claims add to the list of factors influencing taper expectations.

Currency spotlight – EUR/USD eyes 1.19

Some economic data from Europe offered a breath of fresh air today.

Eurozone economic sentiment hit an all-time high in July while the unemployment rate in Germany remained at 5.7% in June, a tick lower than expected. This was the lowest jobless rate witnessed since April 2020. Interestingly, it has been a mixed day for the euro. Although the currency stood tall against the dollar, yen, and swiss franc, it has weakened against other more cyclical G10 majors. Looking at the technical picture, the weaker dollar looks to be propelling EURUSD towards 1.1900. A solid breakout above this level could open the door towards 1.1960 and 1.2000. Alternatively, a decline towards 1.1800 could signal a move back towards 1.1750.