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The U.S. Dollar, after having gained throughout the Asian and European sessions, faced significant headwinds in pre-North American trade as a poor gross domestic product reading for the second quarter deflated expectations of a recovery in the world’s largest economy. Following the data release, the U.S. Dollar fell across the board, with the EUR/USD pair rallying nearly 100-pips in under an hour; similar reactions were seen across the board by other major currencies versus the U.S. Dollar.

Growth was tepid, at best, in the second quarter of the year, with a 1.3 percent annualized rate coming in at a worse-than-expected clip, according to a Bloomberg News survey. The median forecast called for a 1.8 percent expansion in growth. Similarly, data released in regards to first quarter growth was severely disappointing, with the revised figure showing that growth was nearly nonexistent, at a 0.4 percent annualized rate in the first three-months of 2011.

Euro-Dollar 1-minute Chart: July 28, 2011

U.S._Dollar_Sinks_After_Poor_GDP_Reading_Debt_Talks_Continue_body_x0000_i1029.png, U.S. Dollar Sinks After Poor GDP Reading; Debt Talks Continue

Charts created using Strategy Trader– Prepared by Christopher Vecchio

It appears that slower job growth as well as a slower rise in income is holding back the U.S. economy, despite a weaker U.S. Dollar which should, in theory, boost the net exports component of the aggregate growth figure, as a weaker domestic currency should have made domestic goods more appealing to foreigners. Nonetheless, with spending down, only up 0.1 percent in the second quarter after 2.1 percent in the first quarter, and the consumption component of the GDP figure accounting for 70 percent of the headline figure, softened spending ultimately weighed on growth in the world’s largest economy.

U.S. Gross Domestic Product (on a yearly basis): Q3 2005 to Present

U.S._Dollar_Sinks_After_Poor_GDP_Reading_Debt_Talks_Continue_body_Picture_1.png, U.S. Dollar Sinks After Poor GDP Reading; Debt Talks Continue

Courtesy: Bloomberg

In other news in pre-North American trade, Canadian gross domestic product grew 2.2 percenton a yearly basis actual versus the expected 2.8 percent estimate. This was the smallest yearly gain since February 2010 when the Canadian economy grew 1.9 percenton a yearly basis. The root causes of the underwhelming data are most likely the 5.3 percent decline in energy output and the 9.6 percent decline in copper, nickel, lead and zinc production for month of May, contributing to the overall slowed growth of the Canadian economy during the second quarter.

According to a Bank of Canada statement from July 20, the fall in Q2 growth to 1.5 percent from the 3.9 percent growth during the first quarter was most likely due to supply disruptions from slowed government spending, higher food and energy prices, and the aftereffects of the Japanese earthquake.

Following the releases, the Dow Jones FXCM Dollar index plummeted to sessions lows on the data, falling to as low as 9374.58, at the time this report was written. The index has been trading near a session high, of 9443.49 set at 10:40 GMT, at 9439.01, before the U.S. GDP release. However, the disappointing figure, coupled with continued uncertainty over the debt talks, weighed on the Greenback. President Barack Obama announced that he would speak at 14:00 GMT on Friday, likely to further weigh on the Greenback.

U.S._Dollar_Sinks_After_Poor_GDP_Reading_Debt_Talks_Continue_body_Picture_5.png, U.S. Dollar Sinks After Poor GDP Reading; Debt Talks ContinueU.S._Dollar_Sinks_After_Poor_GDP_Reading_Debt_Talks_Continue_body_Picture_6.png, U.S. Dollar Sinks After Poor GDP Reading; Debt Talks Continue

U.S._Dollar_Sinks_After_Poor_GDP_Reading_Debt_Talks_Continue_body_Picture_7.png, U.S. Dollar Sinks After Poor GDP Reading; Debt Talks Continue

Fundamental Headlines

U.S. Contingency Plan Gives Bondholders Priority – Bloomberg

U.K.’s Borrowing Costs Below those of U.S. – Financial Times

Zapatero Calls Early Elections – Financial Times

Moody’s Threatens Spain Rating Cut – Reuters

Republicans Race to Revive Debt Plan – Reuters

USDCHF: In perhaps the biggest move on the day was the Swiss Franc’s continued strength against the Dollar, which only shored up in the minutes following the release. The Franc was already the strongest major currency on Friday, and following Moody’s Investor Service’s announcement that it may downgrade Spain, coupled with the poor U.S. growth reading, market participants bid higher the safe haven fiat on demand for a secure asset as the world’s two economic pillars, the Euro-zone and the United States, continue to show signs of fragility. The pair had hit an all-time low of 0.7875 before pulling back slightly, although downside pressure remains.

Taking a look at price action, the USD/CHF pair is now at the bottom of a descending channel that has been firmly in place since mid-February after breaking through key support of 0.7993 today. While all daily technical indicators suggest that the pair is significantly oversold, and is thus positioned for a major rebound, the fundamental outlook for the pair remains strongly biased to the downside as long as debt woes continue to plague the U.S. As such, despite the extreme technical sentiment the pair is exhibiting, it is best to ignore the technicals on the pair as it sets fresh new lows, almost daily. However, the pair remains a prime target for a significant rebound to the upside should the U.S. economy resume growth and lawmakers resolve the debt ceiling debacle.

Written by Christopher Vecchio, Currency Analyst

To contact the author of this report, please send inquiries to:

Follow Christopher Vecchio on Twitter: @CVecchioFX