Dollar Rebounds Ahead of Q2 US GDP

Growth expected to have doubled from disappointing Q1

The USD dollar is higher against major pairs awaiting the release of US growth in the second quarter. Comments from the Trump administration on plans to move forward on tax reform in the Autumn has also put a bid on the greenback. Pro-growth policies have been delayed as healthcare and immigration took priority for the Administration, but now it appears there is real push them forward.

The US Bureau of Economic Analysis will publish the first estimate of second quarter gross domestic product (GDP) on Friday, July 28 at 8:30 am EDT. The market is forecasting a 2.5 percent gain in the advanced 2Q GDP figures. Growth is anticipated to have accelerated after a disappointing first quarter pace of 1.4 percent. A print below the forecast would be seen as a negative for the USD with the Atlanta Fed upgrading its forecast on Thursday from 2.5 percent to 2.8 percent.

Economic indicators have been mixed for the US economy. The U.S. Federal Reserve hiked the benchmark interest rate in June, but is awaiting signs of accelerated growth before committing to a third rate hike this year. Inflation in the United States remain weak but if employment and growth keep their pace of growth the central bank will hike as planned. A slowdown in the progress of the US economy would trigger a more dovish Fed which could put the dollar under downward pressure.

The EUR/USD gained 0.317 percent in the last 24 hours. The single currency is trading at 1.1665 after a rebound in 10 year yields and an upgrade GDP estimate form the NY Fed got the dollar back on its feet. The July FOMC statement was taken as dovish by the market, but the central bank stuck to previous messaging and regarding inflation removed the ambitious “somewhat” and is now squarely at below the two percent target.

Tomorrow’s first estimate of second quarter GDP is expected to improve from the disappointing first quarter and could in hindsight make the Fed statement less dovish as the central bank has not backed down from its balance sheet reduction plans. The massive bond buying during its QE program will begin to shrink starting in the fall as per the economists and then the market will focus on a potential third rate hike in December.

The Trump administration appears to have moved on from the healthcare debate and is mounting a serious effort to introduce tax reforms in the fall. The joint statement by House Speaker Paul Ryan, Senate Majority Leader Mitch McConnell, Treasury Sec. Steven Mnuchin, National Economic Council Director Gary Cohn, Senate Finance Committee Chairman Orrin Hatch, and House Ways and Means Committee Chairman Kevin Brady was a shot in the arm of the dollar. The tax reform policy is not expected to have as much opposition as healthcare and could be the biggest win so far for the Trump Administration if it passes without issue.

The Fall calendar will be important for the dollar with NAFTA renegotiation to kick off in August, but continue through the last quarter of the year and the just announced tax reform process.

West Texas Intermediate graph

The price of energy has gained 1.138 percent on Thursday. West Texas Intermediate is trading at $48.83 on a volatile session where crude moved more than two percent intraday. Bigger than expected drawdowns in US inventories and what appears to be a change in strategy from shale drillers as US production is anticipated to slow down has given this round to the producers who agreed to cut production.

The Organization of the Petroleum Exporting Countries (OPEC) and other major producers will continue to limit production until March of 2018 with Saudi Arabia taking a leadership role but asking for more compliance to the agreed levels of production. Disruptions in Libya and Nigeria make them exempt of the deal, but as those issues are sorted production has growth threatening the efforts of the group.

Crude has gained 4.7 percent in the last five days as US production has slowed down as evidenced by shrinking inventories. The OPEC agreement is a long way in reducing the supply glut but so far its efforts have resulted in higher oil prices. Internal dissent and the difficulties of proper production compliance will be a challenge going forward as well as a ramp up from Brazil, Canada and US operations once oil reaches higher price levels.

Market events to watch this week:

Friday, July 28
8:30 am CAD GDP m/m
8:30 am USD Advance GDP q/q

*All times EST
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