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The US GDP report may change the balance of power in the foreign exchange market in favor of dollar buyers

Relevance up to 05:00 2022-07-29 UTC–4

After yesterday’s meeting of the US Federal Reserve System, rather substantial data on the US economy’s growth rates could spark a bull market for hazardous assets in high demand. Nevertheless, it is also possible that the dollar may fall further against the euro and the British pound, as the US economy may have demonstrated small improvement in the second quarter of this year, reducing the possibility of consecutive quarterly declines. Even if we experience growth, it will be relatively sluggish, generating anxieties of a potential further collapse.

Economists anticipate that the US gross domestic product will increase by 0.4% annually in the second quarter of 2022. It appears to be an improvement following the first-quarter GDP decline of 1.6 percent. Nevertheless, the breakdown of GDP for the second quarter may reveal a worrying decrease in consumer demand, the primary driver of economic development.

In the first quarter, the decline in growth rates was primarily attributable to a rise in imports, while consumer spending was more moderate. However, in the second quarter, everything changed: reducing the trade deficit will undoubtedly contribute to GDP growth, but consumer spending will undoubtedly decline, which is quite detrimental to the economic outlook.

Clearly, due to the high increase in inflation, everyone anticipates a decline in consumer expenditure. Recent quarterly results from big US retailers such as Walmart Inc. and Target Corp indicate that consumers are already reducing their spending, particularly on high-priced goods. Second-quarter GDP growth will be negatively impacted by a fall in corporate investment, a deteriorating housing market due to higher interest rates, and a sluggish inventory increase. The goods trade imbalance narrowed more than anticipated in June, while retail and wholesale stocks climbed significantly, according to recent data. Consumer spending, the primary driver of the US economy, will be the most crucial aspect of the report for most analysts. It is anticipated that the annual increase in spending will decelerate to 1.2%, which will be the lowest rate in a year. May’s inflation-adjusted spending was likely lower than April’s, and June’s spending is not anticipated to be revised.

According to experts, the economy can develop just enough to avoid a two-consecutive-quarter economic slump, which is the practical definition of a recession. Forecasts by economists differ considerably. About a third, including Bank of America Corporation and Deutsche Bank AG, reported a fall in GDP. Estimates range from a 2.1 percent dip to a 2 percent growth. The National Bureau of Economic Research has already issued a formal announcement concerning the commencement of a recession. Bureau economists define a recession as a major fall in economic activity that affects the entire economy and lasts for at least several months.

Even if the GDP report indicates growth, expectations that inflation will continue to increase and that the Federal Reserve will raise interest rates to combat it will eventually lead to a recession. Yesterday, following a two-day committee meeting, the legislators hiked the key rate by 75 basis points to 2.5% and predicted a “continuous increase” in the future. Most likely, it was the word “gradual” that buyers of risky assets who were anticipating this remembered. The Fed’s future behavior is still uncertain; it depends on the August statistics that will be released this year. There were no instructions regarding the future of interest rates and the best course of action for investors. Powell stated, “Another substantial increase may be necessary at our next meeting, but this decision will rely on the statistics.” “The labor market is extremely hot and unstable, and inflation is still too high for policy tightening to be slowed down.”

It is difficult to predict how the foreign exchange market will respond to the GDP data, but it will not go unnoticed. As for the euro’s outlook, the consolidation at 1.0170 gives purchasers of risky assets an ideal opportunity. Now, the attention has gone to the nearest resistance level at 1.0220. Going over this range will give purchasers of risky assets confidence, creating a clear path to a maximum of 1.0273, which will determine the continuation of the July 14 upswing. A breakdown of 1.0273 will allow for the potential revaluation of 1.0320 and 1.0370. In the case of a decrease in the euro, buyers must demonstrate activity near 1.0170; otherwise, the pressure on the trading instrument will intensify. Having missed 1.0170, you can abandon all aspirations of a rebound, which would open the door to 1.0130 and 1.0090. A breach of this support level will probably raise the pressure on the trading instrument, allowing for a potential return to 1.0040.

Today’s most crucial thing for the pound is maintaining its support at 1.2140. In the event of a breach of this range and a bigger higher advance of the pound, a retracement to 1.2080 and a return to 1.2030 can be anticipated. To bolster their positions, bulls must surpass 1.2200. A breach of this range will return the pound to 1.2260 and 1.2330 with relative ease. The farthest objective will not exceed 1,240 kilometers.

*The market analysis posted here is meant to increase your awareness, but not to give instructions to make a trade.

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