Talking Points

  • U.S. Dollar: 2Q GDP Disappoints, Debt Crisis To Take Center Stage
  • Euro: Further Weakness Ahead On Heightening Fears, Slowing Inflation
  • British Pound: Pares Decline, Range-Bound Price Action Ahead

The U.S. dollar lost ground following the advanced 2Q GDP report, and the greenback may continue to trade heavy over the near-term as the world's largest economy faces a slowing recovery. Indeed, economic activity increased an annualized 1.3% after expanding a revised 0.4% in the first-three months of the year, and the marked slowdown in growth could lead the Fed to expand its balance sheet further as it aims to stimulate the ailing economy. The disappointing GDP print paired with the tepid pace of growth in personal consumption foreshadows an even slower recovery for the second-half of the year, and the Fed may carry the expansion in monetary policy into the following year as the economic outlook remains depressed.

In light of the recent developments, it seems almost certain that the FOMC will retain its zero interest rate policy throughout the remainder of the year, but the committee may open the door to conduct another round of quantitative easing as the world's largest economy faces an increased risk of a double-dip recession. Following the release, the Dow Jones-FXCM U.S. Dollar index (Ticker: USDollar) quickly retraced the advance to 9443.49, and the reserve currency may face additional selling pressures over the following week as the debt crisis comes into focus. As U.S. policy makers struggle to draw up a credible plan to raise the debt ceiling, fears of a credit downgrade may intensify ahead of the August 2 deadline, and currency traders may continue diversify away from the greenback as growth prospects deteriorate.

Heightening uncertainties surrounding the euro-area dragged on the exchange rate during the overnight trade, and the single-currency is likely to face additional headwinds over the near-term as the region faces a slowing recovery. Indeed, Moody's put Spain's AA2 credit rating under review for a possible downgrade, and the European Central Bank may have little choice but to delay its exit strategy further as policy makers struggle to restore investor confidence. In light of easing price pressures, we should see ECB President Jean-Claude Trichet continue to soften his hawkish tone for monetary policy, and the Governing Council may endorse a wait-and-see approach for the remainder of the year as growth prospects in Europe wane. In turn, we are likely to see interest rate expectations deteriorate further, and the EUR/USD should continue to retrace the rebound from 1.3836 as the exchange rate trades within a descending triangle.

The slew of positive developments coming out of the U.K. helped the British Pound to pare the overnight decline to 1.6264, and the GBP/USD may continue to consolidate in the North American trade as it maintains the narrow range from earlier this week. As the recent developments show the recovery slowly gathering pace, the Bank of England may highlight an improved outlook for the region, and the central bank may see a diminishing case to expand its asset purchase target beyond GBP200B as policy makers see a heightening risk for inflation. As the BoE upholds its current policy and strikes a relatively balance tone for the region, the GBP/USD looks as though it will face range-bound price action over the near-term until we see a shift within the MPC. Given the dissenting views within the committee, it seems as though we will see the majority preserve the wait-and-see approach throughout the second-half of the year, and the exchange rate looks as though it will consolidate further in the days ahead as it appears to have carved out a near-term top this week.