US Dollar Still Waiting for Its Breakout but Will the Market Wait until Friday's 2Q G

• US Dollar Still Waiting for Its Breakout but Will the Market Wait until Friday’s 2Q GDP Report?
• British Pound Surprisingly Stable on News Recession Deeper Than Expected
• Euro Finding Its Fundamental Footing as Data Hints
• New Zealand Dollar May Find a Catalyst an RBNZ Rate Decision, Commentary

US Dollar Still Waiting for Its Breakout but Will the Market Wait until Friday’s 2Q GDP Report?

It’s a dangerous way to end the week. All the major technical levels that we have been following in the majors for the past few days (and have been developing for months) are still within a single day’s rally for an active market. Looking back, price action has been inordinately volatile; but the world’s reserve currency has found little direction. It was just the quick decline from Monday that brought the greenback up to the edge of a significant cliff and kept traders biting their nails as they tried to speculate what would be that specific piece of event risk that finally decided the long-awaited trend. Heading into next week, anxiety surrounding the dollar will remain as high as it has been over the past few days; but the fundamental catalysts for the currency and broader markets will grow obscured.

Throughout the bullish wave of sentiment that has guided the markets over for the past two weeks, it was relatively clear that earnings activity was stoking the fires. While there has been a steady build up behind speculation of a recovering, global economy; participants have been looking for hard numbers to confirm the slow return to positive growth. The second quarter earnings season fulfilled this demand while further bolstering expectations for returns. However, the bullish quality of the steady news stream certainly took a dive as time wore on – which is likely the reason the dollar was able to hold its ground despite its safe haven status. Though it is arguable, the second quarter earnings season essentially tapered off yesterday. With disappointing reports from Microsoft, American Express and Capital One to end the session to close us out, there are few blue chip firms left to release their numbers and – more importantly – there are even fewer instances where there will be a grouping of earnings to drum up enough influence to impact risk appetite.

Now, we have to ask ourselves whether risk appetite will ultimately decide the fate of the dollar or domestic fundamental trends will have to take over. Despite the chop seen in the majors and yen crosses recently, the Dow has cleared the psychologically important 9,000 level. Equities have a clear, bullish trajectory; but the other asset classes (currencies, commodities, fixed income) haven’t broken their respective highs. If we do not find a fundamental driver that can carry underlying risk appetite, the rally may begin to fall apart or at the very least, correlations between the different securities will start to breakdown. If there were one market component that could take over the mantle of earnings it would be growth. The top piece of event risk next week is the first reading of 2Q GDP. We have already seen a better than expected pickup in China’s numbers and a deeper than expected contraction in the United Kingdom’s economy; but it will be the US data that is truly global. As the largest economy, global financial center and the catalyst for the worst economic turmoil since the Great Depression, the United States will be treated as the benchmark for the world. Economists predict a sharp moderation in the annualized pace of contraction (from a 5.5 percent clip to 1.5 percent) that would lend credibility to officials’ expectations for positive growth by the end of this year. This single release will no doubt be a fundamental juggernaut for the dollar and broader financial world; but its market impact could be severely diminished due to its release time. Scheduled for release Friday, speculative forces may decide breakout or reversal well before the data crosses the wires. If this ends up being the case, it may very well neutralize the market-moving impact the indicator could have otherwise.

Related Article: Dollar on The Verge of Collapse as Earnings Ease, Growth Firms, Technicals Show Clear Momentum, Breakout Signs

British Pound Surprisingly Stable on News Recession Deeper Than Expected

This week’s top economic release was the advanced measure of second quarter growth for the UK. Considering the extraordinary level of volatility the market maintained leading up to the event – not to mention the fact that GBPUSD was positioned just below major resistance – expectations for its impact were high. When the data did hit the wires, it didn’t disappoint for a surprise element. With economists already pricing in a deterioration on both the quarterly and annual measurements, the report will still manage to disappoint. Over the three month period through June, Europe’s second largest economy shrank 0.8 percent - far more than the 0.3 percent forecasted. Naturally, the year-over-year figure was weighed down to a record-breaking 5.6 percent pace of contraction. From the component data, the closely-watched construction, manufacturing and financial sectors all showed tempered declines. However, their overall contributions would nevertheless slow the economy. This will create further strain on the political front and draw out criticism surrounding the BoE’s decision not to expand its purchasing program.

Related Article: The UK GDP Report Offers Few Positive Highlights

Euro Finding Its Fundamental Footing as Data Hints

Not long ago, the IMF issued its quarterly forecasts on growth for the industrialized and emerging economies. In the rankings, the group found that both the US and Japan would enjoy recoveries that were more aggressive and absolute than the Euro Zone would. However, recent data seems to be telling a different story. Following a report from the Bundesbank earlier this week that suggested the German economy contracted “only slightly” in the second quarter, euro traders received a round of data today that progressed expectations for a recovery. The Euro Zone and German PMI indicators for manufacturing and service sector activity extended their recovery to hit 10-month highs. Covering a significant portion of the economy, these indicators are essentially leading indicators for broader growth. However, it is notable that they are all still under 50.0.

New Zealand Dollar May Find a Catalyst an RBNZ Rate Decision, Commentary

Data from around the world suggests financial conditions are stabilizing and economic activity is recovery. From there, it is only a matter of time before interest rates rise and investment capital floods back into the market. This situation leverages a premium for those currencies that already have a natural premium and more importantly that are expected to see interest and market rates rebound more quickly than their counterparts. Traders will be looking to see whether economic troubles will continue to weigh the RBNZ down and further take the kiwi out of the running next week. Central bank Governor Alan Bollard will announce rates Thursday morning in Wellington. The consensus from economists and the market is for the rate to be kept at 2.50 percent; but the commentary that accompanies the decision could be just as market-moving as hike or cut.

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Written by: John Kicklighter, Currency Strategist for
E-mail: <[email protected]>