US Open Note – FOMC’s tone knocks the dollar

Markets barely react to US GDP miss as Chairman Powell still on their mind; Eurozone inflation comes in strong

The major US indices managed to remain resilient after yesterday’s FOMC comments from Chairman Powell, who signalled that patience is needed as there is still a ways to go before tighter policy. Markets have hardly reacted to the release of US GDP and jobless claims in relation to the expansion of the US economy in the Q2.

The US economy grew by 6.5% in the Q2, missing the forecast of 8.5% but overshot the previous quarter’s growth rate of 6.3%. The GDP prices component accelerated by 6.1%, beating expectations of 5.4%, highlighting a pickup in inflation. The expansion in the US economy is modestly softer than was expected. However, from here the question is whether the delta variant, supply chain disruptions and continued shortages of workers persist moving forward, which could hamper growth while keeping inflation elevated in the latter half of the year.

US jobless claims fell less than the expectation of 380K, although there was still a reduction in the number of Americans claiming unemployment benefits. 400K people claimed benefits compared to the previous week's number of 424K.

The dollar index has been on the back foot for the last couple of days with yesterday’s comments from Chairman Powell steering the dollar index just below the 92.00 barrier. Chairman Powell also touched on inflation, saying it was linked to the reopening of the economy, signalling that it remained transitory for now. A stronger labour market was also implied, which could boost inflation further and thus shrink the taper timeline.

It seems the dovish tone regarding raising rates from Chairman Powell appears to have hurt the dollar, in spite of the surprisingly hawkish stance on tapering, which was modestly dampened through suggesting patience is still warranted as the booming economy recovers. That said, continued divergence in central bank signals for rate hikes could aid the greenback moving higher towards the end of the year.

The forex arena capitalised on dollar weakness with the euro improving by a cent to $1.1875 and the pound continuing its climb hitting $1.3960. USD/CHF dipped to a 1½-month low beneath the 0.9100 border, while the yen found its feet back below 110.00 around the 109.85 level.

The ECB is bound to remain accommodative despite consumer sentiment in July rising to its highest of 119.00. Germany has seen a rise in employment in the previous month by 91K people and inflation picked up in Spain and Germany. German inflation accelerated to 3.8% above expectations of 3.3% y/y, with a monthly headline figure of 0.9% versus the forecast of 0.5%. Spain’s CPI y/y was also stronger-than-expected at 2.9% versus the estimation of 2.7%.

Powell injection boosts commodities

Yesterday’s message of patience from the Fed’s commander-in-chief, Chairman Powell, aided the headways made in silver and gold, which reached $25.50/oz and $1,824/oz respectively as the dollar took a hit. Antipodean currencies also benefited, ticking up with the aussie spiking above 0.7400, while the kiwi touched the 0.7000 mark.

US oil inventories fell by 4.1Mln barrels, which may have, along with a softer dollar, aided WTI oil futures in temporarily peaking above $73.00. Oil futures have now retreated to the $72.50 per barrel level. The loonie dipped but found its feet around C$1.2455.

At 14:00 GMT, US Pending Home Sales m/m are scheduled, while New Zealand’s monthly data for new building approvals is due at 22:45 GMT.

Then Japan’s unemployment rate is out at 23:30 GMT, followed by its monthly industrial production and retail sales at 23:50 GMT.

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