Positive US economic data confirm the strength of the US economy and Pound is at risk of falling if the interest rate is not raised
US GDP growth accelerated to 4.1% for the second quarter of 2018, its strongest reading since 2014. The Dollar Index (USD/DXY), a measure of the value of the US Dollar against a basket of foreign currencies slipped 0.11% to 94.67. Analysts had forecast GDP growth to strengthen to 4.2%. The yield on the benchmark US 10-year bond slipped 2 basis points to 2.95%.
Outlook: Amazingly the GDP Deflator, the broadest measure of inflation and the Federal Reserve’s primary gauge, jumped to 3.0% from a previous upwardly revised 2.2%. The Fed will make clear that more rate hikes are coming as it meets on monetary policy this week.
Other data released Friday saw a modest rise in Tokyo’s Annual Core CPI while quarterly Australian PPI slipped. The revised reading of the US University of Michigan Consumer Sentiment beat expectations.
Trading View: While the US GDP data underscored a bubbly economy, it missed lofty expectations which preceded the number. President Trump tweeted that the numbers were “great”. Consumer spending and business investment saw strong rises. On the trade side, net exports contributed 1.06% to the growth pace, partly on a surge of soybean exports ahead of retaliatory tariffs.
The US Dollar remained stuck within the ranges it has established over the course of the month. The Greenback has tested both sides, slumping on fears of a trade and currency war as US President Trump accused China and Europe of manipulating their currencies last week. Traders largely ignored this with the effects short-lived. Ahead of Friday’s US Q2 GDP release, the Dollar Index (USD/DXY) jumped to trade near its immediate resistance of 95.00. It remains within a 93.20-95.60 wider range, 94-95 the narrower one. We can expect more of the same for the earlier part of this week.
Market positioning remains a headwind for the Dollar. The latest CFTC/Reuters report saw speculators raise their net total US Dollar bullish bets to the largest since January 2017. The net total long US Dollar position climbed to +USD 20.33 billion (week ended July 24) from +USD 18.41 billion the previous week. The only Major currency where the speculators were short USD was against the Euro.
Net short JPY bets increased to -JPY 73,769 contracts from the previous week’s -JPY 59,000., the largest number since March this year. More on the currencies in their summaries below.
The Dollar Index (USD/DXY) traded to an overnight high of 94.910 before slipping to close at 94.67, down 0.11% (94.744 Friday). The Dollar Index has immediate resistance at 94.90/95.00. The next resistance level is 95.20 and then 95.50. It is difficult to see a sustained break outside the 94-95 range today and for the earlier part of this week. Today’s likely range is 94.50-95.00. Just trade the range shag on this one.
USD/JPY – finished at 111.02 in New York, down 0.14% from Friday mornings 111.23. The Dollar-Yen traded to an overnight high of 111.25 which remains immediate resistance on the day. The next resistance level is at 111.50. Immediate support can be found at 110.80 (overnight low 110.796). The next support level is at 110.60. On Friday, Japanese 10-year JGB yields closed up one basis point at 0.09%. The BOJ is expected to keep its policy rate unchanged at this week’s monetary policy meet (Wednesday). Traders are looking for “tweaks” from the BOJ as it seeks to end its massive stimulus program. Unless we see the US 10-year bond rate charge above 3.0%, USD/JPY has more downside risk. Likely range today 110.60-111.20. Prefer to sell rallies.
EUR/USD – closed little-changed at 1.1658 from 1.1648 Friday. EUR/USD traded to an overnight high of 1.1665. Immediate resistance lies at 1.1665/75 with strong resistance at 1.1700. Immediate support can be found at 1.1620/30. The overnight low traded was 1.16203. EUR/USD has not broken out of a wider 1.15-1.18 range with the narrower range, 1.1580-1.1730. Today look for a likely range of 1.1625-1.1675. Prefer to sell rallies.
AUD/USD – The Aussie managed to trade higher against the Greenback, recording a modest gain to 0.7407 (0.7380 Friday). While Copper prices slipped, most base metals rose. Overnight high traded for the AUD/USD was 0.74146. Immediate resistance lies at the 0.7415/20 level, followed by 0.7450/60. Immediate support can be found at 0.7370/80 and then 0.7340/50. AUD/USD has been trading between 0.73 and 0.75 cents for almost two months now. It’s difficult to see a sustained break outside of that range as we end the Northern hemisphere summer. Likely range today 0.7375-0.7415. Prefer to sell rallies on the day.
GBP/USD – The prospect for a Brexit without an agreement has increased and will weigh on the British Pound. GBP/USD ended marginally lower at 1.3105 from 1.3115 Friday. The overnight low traded was 1.3082. Immediate support can be found at 1.3080. The next support level lies at 1.3050. Sterling traded to an overnight high of 1.31309. Immediate resistance lies at 1.3130. The Bank of England rates policy meeting is this week (Thursday). Unless BOE Governor Mark Carney and his colleagues hike interest rates and signal for more, Sterling looks vulnerable to the downside. An overall stronger Dollar will accelerate this. The one positive note for the Pound is that the speculative community is short Pounds. Look for some increased volatility in this little puppy with the likely range today 1.3080-1.3150. Prefer to buy dips.
Events and economic data release today: Germany Preliminary CPI (m/m); Spanish Flash CPI (annual); UK Net Lending to Individuals (m/m); US Pending Home Sales (m/m).
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