Fed Comments Push Dollar Higher Awaiting US Q2 GDP

USD Gains After Subtle FOMC Statement

The Federal Reserve wrapped up its two day monetary policy meeting and as expected did not announce a rate change. The market was waiting to review the language of the written statement and the changes were subtle. The Fed removed modifiers from its labor language to indicate the employment picture in America remains strong. The flipside was the central bank’s concerns with inflation which remains well below the desired target of 2 percent. The July FOMC statement was USD positive as both the September and December meetings could still bring interest rate hikes but shed no real clarity of when the Fed would announce the end of record low interest rates.

The U.S. Department of Commerce will release the gross domestic product (GDP) for the second quarter on Thursday, July 30 at 8:30 am EDT. After the disastrous first quarter GDP the market anticipates the U.S. to have shaken off the negative factors that dampened growth . The forecast for the second quarter GDP calls for a 2.5 percent growth in the first of three releases of American good and services production. The advance report is often the one that shapes the expectations as it does not tend to deviate from the other 2 releases as it gets closer to the final release data point. Strong economic growth could make the case for a September rate hike.

The USD gained across the board, but the moves were less than expected given the inconclusive tone of the FOMC statement. Tomorrow’s release of 2Q GDP and unemployment claims will help drive the direction of the forex market with the next major milestone being the non-farm payrolls report on Friday, August 7. Given the changes to the language the Fed is counting on a strong employment report, and in particular of the wage inflation component.

A September rate hike will not be discounted until it has passed in a manner similar to what happened in June. September and December remain as possibilities with higher probabilities given that there is a press conference after each one. The Fed has tried to dissuade the market from focusing on those two as it has said on the record that a rise in interest rates could come at any of the scheduled FOMC meetings, press conference or not. There is no meeting in August, which will give the market and the Fed extra time to look at the data ahead of the September FOMC meeting.

USD events to watch this week:

Thursday, July 30
8:30am USD Advance GDP q/q
8:30am USD Unemployment Claims

*All times EDT
For a complete list of scheduled events in the forex market visit the MarketPulse Economic Calendar

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Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He has been published by The MarketWatch, Reuters, the Wall Street Journal and The Globe and Mail, and he also appears regularly as a guest commentator on networks including Bloomberg and BNN. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza