USD broadly stronger as Q2 GDP growth beats expectations
EUR steady as Eurozone CPI data meets expectations
Commodity currencies are lower after dovish comments from RBA governor Glenn Stevens
USD - The dollar rallied against most major counterparts after the release of upbeat U.S. economic data and ahead of the Fed’s interest rates announcement. The U.S. economy grew much faster than expected, coming in at 1.7% in the second quarter, surpassing the forecasts for a rise of 1.0%. Also, the U.S. private sector announced that it added 200,000 jobs this month when the market was only expecting a rise of 180,000. The positive data will reinforce expectations that the Fed could start scaling back its stimulus program as early as next month. Fed Chairman Ben Bernanke originally stated back in May that the U.S. central bank could cut back on its bond purchases by September. However, Bernanke backtracked a few weeks ago, stating that the Fed would keep its stimulus program in place if U.S. growth moderated. Analysts will eagerly await the 11am PST announcement by the Fed and look for any commentary cementing the timing of the reduction in stimulus. With strong data out this morning, supporting a scale back in stimulus at least this year, look for any positive commentary out of today’s announcement to push the dollar higher.
EUR – The euro is trading close to yesterday’s levels after the release of Eurozone CPI data. The CPI data came in close to expectations at 1.6% y/y and 1.1% y/y on the core figure. The unemployment rate held steady at 12.1%. The market will turn its attention to the ECB announcement tomorrow, where expectations are that they will reaffirm their commitment to low rates. Most analysts’ sentiment for the euro remains bullish, but look for the currency to trade within a fairly wide range over the next couple of months with further upside potential limited around the 1.34 level.
GBP - The pound is weaker vs. the dollar today ahead of tomorrow’s BoE monetary policy meeting, where new governor Mark Carney is widely expected to keep interest rates low in the near-term. However, many expect the BoE to eventually outline a plan for guiding the future direction of monetary policy, possibly as soon as next week after the release of the Quarterly Inflation report. The plan would most likely tie future movements in interest rates to a recovery in the growth or labor market. Look for sterling to hold close to current levels as the markets await the Fed announcement later this morning.
JPY - The yen initially strengthened today in early trading but has since pared its gains and is now weaker vs. the dollar on limited news flow and economic data. Month-end buying from equity managers and a drop in the Nikkei boosted demand for the yen at the start of today’s trading session, but the catalyst for the reversal remains unclear.
Commodities - The CAD weakened to its lowest level in more than a week against the USD after data showed Canadian GDP grew by only 0.2% in May from April, a lower-than-forecast figure that trimmed expectations for second-quarter GDP. This comes as US GDP figures unexpectedly grew 1.7% in the second-quarter. Meanwhile, the AUD was under heavy pressure, heading for a third straight month of losses, as investors wagered that domestic interest rates would be cut to record lows as soon as next week. The slide followed dovish comments from RBA Governor Glenn Stevens yesterday, which led the market to price in a cut in rates next week. The NZD also lost some ground against the USD, yet the kiwi is still managing to gain 3.1% for the month, the largest monthly move since September last year. The kiwi was supported by increasing its forecast for payouts to the farming sector thanks to a rise in global prices and a lower currency. Meanwhile, the ANZ Bank's latest business outlook showed confidence at its highest in 14 years, led by optimism among construction-related companies while firms in other sectors also became more optimistic about their outlook.
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