US Dollar Outlook Steadies After GDP Release

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US Dollar Outlook Steadies After GDP Release

Near Term Weakens But . . .

The US dollar weakened Friday morning after the release of US 2nd quarter GDP data. The data was strong at 2.6% but only as-expected and there was a downward revision to the previous month which seemed to accelerate the near term down trend. By mid morning the tables had turned however as traders look to the long term.

The recent down trend in the Dollar Index, caused by a shift in ECB stance and decline in FOMC expectations, may have reached bottom. The forces in play are driven by expectations that are not grounded in the data. Bullishness in the euro is likely over blown as the bank is still quite far from actually implementing any form of policy tightening, dovishness from the FOMC at a likewise extreme as forward looking data suggests expansion in the second half of the year.

The Index Of Labor Market Conditions, a gauge of 24 of the FOMC’s most closely watched labor market indicators, is signaling economic growth and expansion of that growth to post recession highs as early as this fall. The latest read shows activity just below the post recession high and well above the 0 line with momentum trending at record highs. A 0 line crossover as occurred late in 2020 has signaled the last 3 major bull markets.

The Index of Leading Indicators confirms this signal. The index has been positive for 11 out of the last 13 months in evidence of ongoing economic expansion. The most recent read has it rising to 0.6% and matching the highest levels in the past few years. The jump is indicative of ongoing economic growth and expansion of that growth. Economists at the Conference Board say that an uptick in growth is likely before the end of the year.

If these two indicators are right the FOMC could easily find themselves behind the curve and the market is beginning to recognize that. The data could easily begin to edge higher as early as next week’s NFP and unemployment bundle. As soon as we see inflation begin to heat up rate hikes will be back on the table and the dollar will arrest if not reverse its fall. Wage inflation is already trending above 2.5%, core inflation is not far behind and likely to rise alongside oil prices which happen to have hit a new 2 month high as the week drew to a close.

Traders should look for signs of support/resistance in USD pairs. The EUR/USD is breaking above a resistance target now and seem poised to head higher near term. Upside target is near 1.1800 in the near term with a chance resistance will set in. All it will take is a little weak data in the EU or a little strong data in the US.

Gross Domestic Product

Real gross domestic product (GDP) increased 2.1 percent in the fourth quarter of 2020, according to the “third” estimate released by the Bureau of Economic Analysis. The growth rate is the same as in the “second” estimate released in February. In the third quarter, real GDP also increased 2.1 percent.

US Dollar Outlook: US Q3 GDP Starter Before FOMC Main Course

US Dollar and Q3 GDP Analysis, Price and Charts

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Brand New Q 4 2020 USD Forecast and Top Trading Opportunit ies

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USD Volatility Likely After High Importance Events

The US dollar has traded in a tight range over the last 4-5 days as traders stick on the sidelines ahead of today’s advanced US Q3 GDP release and the latest interest rate decision from the Federal Reserve. A slowdown in US growth is expected while the Fed is fully expected to cut interest rates for the third time this year by another 25 basis points.

The first look at US Q3 GDP is expected to show q/q growth slowing to 1.6% from a prior quarter 2.0%. The Atlanta Fed’s GDPNow model estimates growth of 1.7%, while the New York Fed’s Nowcast model estimates show economic expansion of 1.9%. While the US is still expected to show robust growth, the market estimate of 1.6% would be a multi-year low, aside from Q4 2020. US growth has exceeded 3% in four out of the last seven quarters.

While US growth remains robust in global terms, the ongoing US-China trade war is starting to weigh on GDP and in particular the manufacturing sector. The last ISM manufacturing print of 47.8, missed expectations of 50.1 and highlighted the steepest slowdown in manufacturing since mid-2009. This Friday’s ISM release is expected to remain in contraction territory with market expectations of a 49.0 out turn.

Later today the US Federal Reserve is fully expected to cut US interest rates by another 25 basis points, the third cut this year. US dollar volatility is expected to rise around this event with traders looking to subsequent commentary from Fed Chair Jerome Powell on the health of the economy and the future path of interest rates.

The US dollar basket (DXY) has traded in a narrow range in the last few days after breaking its strong uptrend on October 10. The daily chart shows the 200-day moving average acting as short-term support, but any GDP miss and/or dovish commentary from Powell may see this prop come under pressure.

US Dollar Basket (DXY) Price Chart (January – October 30, 2020)

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Traders may be interested in two of our trading guides – Traits of Successful Traders and Top Trading Lessons – while technical analysts are likely to be interested in our latest Elliott Wave Guide .

What is your view on the US Dollar – bullish or bearish?? You can let us know via the form at the end of this piece or you can contact the author at [email protected] or via Twitter @nickcawley1 .

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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