US Dollar Peaks As US Economy Is Still In Perfect Shape

The US Dollar (USD) is in a tug-of-war against the rest of the world it seems with first the Greenback up against nearly every major currency in Asian trading, next down during the European session and now back up at the start of the US trading session. Earlier today Spanish inflation fell less than expected, making the Euro outperform the Greenback, while the Swedish Riksbank dropped the ball with a dovish hike, prompting the Swedish Krona to depreciate substantially against the US Dollar. US Federal Reserve (Fed) Chairman Jerome Powell already hit the stage at the start of the European session and made a carbon print of what he said on Wednesday by again committing to two more interest-rate hikes, possibly consecutive ones. As if that was not enough, the People’s Bank of China (PBoC) fixed its Yuan again firmly stronger against the US Dollar, in a one-trick-pony as seen on Tuesday. 

With Powell already out of the way, traders will be fully focused on two batches of economicdata to come out. The first batch was the most important one with US Gross Domestic Product (GDP) coming in at 2.0%, coming from 1.3% previous, where expectations were for a slim gain to just 1.4%. So GDP smashed it out of the parc and more tailwinds added for the US Dollar with both Initial and Continuing Jobless Claims dropping substantially with the Initial claims dropping from 264k to 239k. Continuing Claims heads from 1,759k to 1,742k. This should take away some recession fears for now and underpin the Greenback. 

Daily digest: US Dollar steamrolls through markets

  • US Gross Domestic Product Annualized for Q1 comes in at 2% from 1.3% previous. GDP Price Index for Q1 from 4.2% to 4.1%. Initial Jobless Claims from 265k to 239k and continuing claims from 1,759k down to 1,742k. US Dollar rallied back in the green against most currencies. 
  • German inflation numbers are pointing to an uptick in inflation and might force the hand of the European Central Bank (ECB) to do more rate hikes as currently anticipated. This weighs on the EUR/USD pair with Euro outpacing the Greenback. 
  • Halfway through the European session the picture gets completely reversed with this time mounting losses on several fronts as traders are starting to show rate-fatigue after hearing yet again the same message from Powell. 
  • The Swedish central bank (Riksbank) opted for a 25 basis point hike this morning. The bank also issued the commitment that it will defend its currency with interventions. This means the market could challenge this commitment, underpinning the Greenback against the Swedish Krona and other Scandinavian currencies such as Danish Krone (USD/DKK) and Norwegian Krone (USD/NOK). 
  • China’s PBoC tried to surprise markets again with a stronger fixing of its Yuan against the US Dollar. This time markets shrugged off the move as insufficient and even sent USD/CNY substantially higher to nearly Wednesday’s level  near 7.25. USD/CNY trades in the green though off the highs for now. 
  • Second batch of data at 14:00 with Pending Homes sales data for May. The monthly number is expected to jump from 0% to 0.2%. On a yearly basis, pending home sales are expected to  decline 21.9%, more than the 20.3% decrease seen in April. 
  • One US Fed speaker is expected after Powell. Atlanta Fed President Raphael Bostic will give a speech on the US economic outlook at the Irish Association of Investment Managers Annual Dinner at 19:00 GMT. He already came out with a few statements this morning saying that inflation is expected to last for a long period and that he doesn’t see any urgency to move as others. 
  • The US banking stress test results were published on Wednesday, and all 23 biggest banks passed it with flying colours.  
  • In early European trading, US Fed chairman Jerome Powell made a copy-paste of his Wednesday speech. Powell repeated that the majority of FOMC members see two or more rate hikes by year-end. 
  • The equity gains from Wednesday were getting pared back in Asia trading as both the Japanese Topix and the Chinese Hang Seng closed in the red. European markets are very mixed, baffled by Spanish inflation falling less than expected and indications that German inflation will accelerate, triggering the risk that more monetary tightening might be needed from the ECB.  US equity Futures point to a rather mixed session as well while banking stocks are favored. 
  • The CME Group FedWatch Tool shows that markets are pricing in a 81.8% chance of a 25 basis points (bps) interest-rate hike on July 26th. After US Fed chairman Powell repeated twice in the past 24 hours that the Fed is committed to hiking twice, markets are sticking reluctant to the one-and-done belief. 
  • The benchmark 10-year US Treasury bond yield trades at 3.84% after a wild ride in the last 24 hours. On Wednesday, the 10-year T-note dropped to almost 3.70% as bonds were bid again and this morning saw the full drop pared back as European inflation proved sticky. US Bonds are being sold currently as US equities are favored after the successfull banking stress test results. 

US Dollar Index technical analysis: USD hits homerun

The US Dollar is not done for today as it pairs back earlier losses, heads back into the green and peaks at session’s high. The nervous moves comes after a very eventful morning in Europe where inflation flared up in several countries and the Swedish Riksbank committed to defend its currency. That triggered a knee-jerk reaction and pulled the US Dollar Index (DXY) back down below 103.00, and now back above as US GDP and a drop in jobless claims takes away recession fears. 

On the upside, the 100-day Simple Moving Average (SMA) briefly got pierced through at 103.04 and next saw the DXY retreat by a stronger Euro and Yuan. It looks like those pairs are reversing again in favor of US Dollar strength and might push the DXY back above 103.00. Once that happens, look for 103.50 as the next key level to the upside. 

On the downside, the 55-day SMA near 102.67 is up for proving its reliability as a support element after being chopped up that much in the last two weeks. A touch lower, 102.50 will be vital to hold from a psychological point of view.  In case the DXY slips below 102.50, more weakness is expected with a full slide to 102.00 and a retest of June’s low at 101.92.

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