US Dollar rallies as US economy grows strongly in Q2
- The US Dollar gathered strength against its rivals after upbeat US data releases.
- The US Dollar Index recovered above 101.00 following earlier decline.
- US Gross Domestic Product (GDP) grew at an annual rate of 2.4% in Q2.
The US Dollar gathered strength in the second half of the day on Thursday as investors reacted to the robust macroeconomic data releases from the US. The USD index – which tracks the USD’s valuation against a basket of six major currencies – turned positive on the day near 101.50 after touching a weekly low of 100.55 during the European trading hours.
The real Gross Domestic Product (GDP) of the US expanded at an annualized rate of 2.4% in the second quarter, the US Bureau of Economic Analysis’ (BEA) first estimate showed on Thursday. This reading followed the 2% growth recorded in the first quarter and surpassed the market expectation of 1.8% by a wide margin.
According to the US Department of Commerce, in seasonally adjusted term Durable Goods Orders jumped 4.7% on a monthly basis to reach $302.5bn. Meanwhile, the latest data published by the US Department of Labor (DOL) showed that Initial Jobless Claims decreased by 7,000 to 221,000 in the week ending July 22.
Daily digest market movers: US Dollar firms on robust US data
- According to the CME Group FedWatch Tool, the probability of one more rate increase this year is back above 30% after latest US data. The benchmark 10-year US Treasury bond yield stays in positive territory above 3.9%.
- Wall Street’s main indexes opened in positive territory, with the Nasdaq Composite Index leading the rally with a daily gain of 1.5%.
- The Fed raised its policy rate by 25 basis points (bps) to the range of 5.25%-5.5% following the July policy meeting as expected. The Fed made little adjustments to the policy statement from June and the publication failed to trigger a market reaction. In the post-meeting press conference, Powell’s cautious comments on further policy tightening caused the USD to come under renewed selling pressure.
- Powell refrained from confirming another rate hike this year and said that every policy meeting will be live. “If we see inflation coming down credibly, we can move down to a neutral level and then below neutral at some point,” Powell told reporters and noted that the policy was already restrictive.
- Commenting on the Fed event, “Fed Chair Jerome Powell refused to give forward guidance and stressed the importance of data. The bank will make decisions on a meeting-by-meeting basis. While it upgraded its comments on the economy – moderate instead of modest growth – it sees expansion as a good thing,” said FXStreet Analyst Yohay Elam. “Regarding the burning topic of inflation, the Fed is holding off the champagne bottles, saying the latest report could be a one off. Nevertheless, it sees current policy as restrictive. “
- Consumer sentiment in the US continued to improve in July, with the Conference Board’s Consumer Confidence Index rising to 117.0 from 110.1 (revised from 109.7) in June.
- Further details of the publication showed that the Present Situation Index climbed to 160.0 from 155.3 and the Consumer Expectations Index advanced to 88.3 from 80.
- The benchmark 10-year US Treasury bond yield holds above 3.85% following Wednesday’s pullback.
- US S&P Global Manufacturing PMI improved to 49.0 in July’s flash estimate from 46.3 in June. Services PMI edged lower to 52.4 from 54.4 in the same period. Finally, Composite PMI declined to 52.0 from 53.2, pointing to an ongoing expansion in the private sector’s business activity, albeit at a softening pace.
- Commenting on PMI surveys’ findings, “July is seeing an unwelcome combination of slower economic growth, weaker job creation, gloomier business confidence and sticky inflation,” said Chris Williamson, Chief Business Economist at S&P Global Market Intelligence. “The overall rate of output growth, measured across manufacturing and services, is consistent with GDP expanding at an annualized quarterly rate of approximately 1.5% at the start of the third quarter,” he added.
Technical analysis: US Dollar Index gathers bullish momentum
The US Dollar Index (DXY) broke above 101.00 (static level, psychological level) and the Relative Strength Index (RSI) indicator on the daily chart recovered above 50 after US data, pointing to a bullish tilt in the short-term bias.
101.40 (20-day SMA) aligns as a key pivot point for DXY and a daily close above that level could open the door for an extended rally toward 102.00 (static level, former support) and 102.50-102.60 (50-day SMA, 100-day SMA).
On the downside, 101.00 (static level) aligns as first support ahead of 100.50 (static level) and 100.00 (psychological level, static level) and 99.60 (multi-year low set on July 18).
GDP FAQs
A country’s Gross Domestic Product (GDP) measures the rate of growth of its economy over a given period of time, usually a quarter. The most reliable figures are those that compare GDP to the previous quarter e.g Q2 of 2023 vs Q1 of 2023, or to the same period in the previous year, e.g Q2 of 2023 vs Q2 of 2022.
Annualized quarterly GDP figures extrapolate the growth rate of the quarter as if it were constant for the rest of the year. These can be misleading, however, if temporary shocks impact growth in one quarter but are unlikely to last all year – such as happened in the first quarter of 2020 at the outbreak of the covid pandemic, when growth plummeted.
A higher GDP result is generally positive for a nation’s currency as it reflects a growing economy, which is more likely to produce goods and services that can be exported, as well as attracting higher foreign investment. By the same token, when GDP falls it is usually negative for the currency.
When an economy grows people tend to spend more, which leads to inflation. The country’s central bank then has to put up interest rates to combat the inflation with the side effect of attracting more capital inflows from global investors, thus helping the local currency appreciate.
When an economy grows and GDP is rising, people tend to spend more which leads to inflation. The country’s central bank then has to put up interest rates to combat the inflation. Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold versus placing the money in a cash deposit account. Therefore, a higher GDP growth rate is usually a bearish factor for Gold price.