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The US Dollar firmed against most major currencies on Friday after data revealed the U.S. economy grew at a healthy pace in the second quarter of this year, which fueled already growing expectations that rate hikes will come sooner than later in 2015.
The US Dollar advanced after the Commerce Department said U.S. gross domestic product expanded at an annual rate of 4.6% in the second quarter, in line with the consensus forecast, after contracting by 2.1% in the first three months of the year. U.S. second quarter GDP was initially reported to have
increased by 4.2%.
The positive data fueled already growing expectations for rate hikes to kick in earlier next year than once anticipated.
On Thursday, Dallas Federal Reserve President Richard Fisher said that the U.S. Fed may start raising interest rates around the spring of 2015, earlier than many market expectations.
Separately, the Thomson Reuters/University of Michigan final consumer sentiment index remained unchanged at 84.6 this month, just shy of expectations for an uptick to 84.7.
Over the past week, aiding the EUR's demise was the European Central Bank President Mario Draghi reiterating that Eurozone policymakers could use additional unconventional policy measures if it felt that its inflation target was threatened. But further US Dollar strength will need to be derived from how the Federal Reserve manages its balance sheet, and it's here that opinions begin to split. Currently, the Fed has all the tools it needs to raise borrowing costs when it decides the U.S. economy is strong enough to take it, and it can be expected them to keep adjusting its policy as it exits the current stimulus program.
The expected breadth and depth of the EUR-USD downtrend varies, ranging from 1.17 to 1.22 over the next six months, solely on expectations that the ECB will have to implement QE to bolster inflation. This week, Draghi again maintained ECB policy would remain accommodative for the foreseeable future. However, he also stressed that he did not see inflation risks in the Eurozone - he sees risks to low inflation for a "long time." Draghi's tone has many wondering whether full-blown QE might be on the cards. The ECB has already pledged to buy some types of nongovernment bonds, and an extension into euro sovereign debt seems to be the next reasonable step.
In reality, many questions do remain, not least around the mechanism that the ECB could use given German legal obstacles. Like most G-7 central banks, the ECB could provide unlimited amount of capital or credit, but if the fiscal and structural set up hurts rather than aids the region, what's the point?
With risk assets in freefall this Thursday across the various asset classes, there is no bigger safe haven for investors than the mighty U.S. Dollar. EURUSD big move lower has followed 10 days of consolidation, and the next target is the November 2012 low of 1.26602. With the market predominately short, next week's ECB post-rate setting press conference will set the tone for the EUR-USD next directional leg.
Europe will kick-start next week's trading activity with German preliminary inflation numbers. It will be an all-day event on Monday because the 'actual'
is comprised of data from six German states, which report their consumer-price indexes throughout the day. Both China and the U.K. will deliver
manufacturing purchasing managers' indexes by midweek, just after the market gets to gauge consumer confidence in the U.S.
The ECB monetary policy meeting will dominate activity on Thursday. The rate decision is often priced in to the market, so expect it to be overshadowed by the ECB's post-meeting press conference.
Meanwhile in Japan, data showed that the country's consumer price index rose at an annualized rate of 3.3% this month, missing expectations for a 3.4% increase. Core consumer price inflation, which excludes fresh food, rose 3.1% in September from a year earlier, missing expectations for an increase of 3.2%. USD-JPY closed up 0.51% at 109.280.
The US Dollar was up against the British Pound, with GBP-USD down 0.43% at 1.6246.Against the commodity currencies, the US Dollar was up against the Canadian, Australian and New Zealand Dollars, with USD-CAD up 0.44% at 1.11535, AUD-USD down 0.25% at 0.87642 and NZD-USD down 0.71% at 0.78661.
USD-CAD was trading near a six-month peak on Friday, supported by the release of positive U.S. economic growth data. USD-CAD hit 1.11672 during U.S. trade, the highest since March.
This is followed by the U.S. non-farm payrolls (NFP) report which will close out the week. The NFP's importance usually makes for a hefty market impact. Also, Canada will produce its gross domestic product numbers in the first half of the week, while Canadian trade balance data will follow the U.S.'s own trade numbers release on Friday.
Down Under, New Zealand's monthly ANZ Business Outlook survey will be out on Monday. It's a leading indicator of that country's economic health. It's worthwhile to note the Kiwis' business confidence numbers have been on a downward trend over the last six months. Business sentiment is usually an early signal of future economic activity such as spending, hiring, and investment. Not to be left out, the Aussie's monthly retails sales are reported on Tuesday, a day before building approvals and trade numbers.
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Forex Outlook 27.09.14
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