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US Dollar Turns to GDP Data & Fed Rate Cut Bets

US Dollar Turns to GDP Data & Fed Rate Cut Bets

Rich Dvorak, Analyst

US DOLLAR EYES Q2 GDP REPORT & JULY FED MEETING

  • USD currency traders will turn to upcoming Q2 US GDP slated for release Friday at 12:30 GMT
  • US GDP data has potential to impact the Fed’s monetary policy update next week and looks to weigh on rate cut expectations
  • Join DailyFX’s Senior Currency Strategist Chris Vecchio, CFA for live webinar coverage of the Q2 US GDP Data Report

The US Dollar is set to take the spotlight during Friday’s trading session with currency traders awaiting the release of GDP data from the world’s largest economy. Q2 US GDP is expected to cross the wires at an annualized growth rate of 1.8% according to Bloomberg’s median estimate, which compares to last quarter’s red-hot print of 3.1% and last year’s Q2 reading of 4.2%.

Q1 US GDP came in noticeably above consensus for the headline figure, but the underlying details revealed a bleaker depiction of the US economy with large inventory builds, higher than expected government outlays and weaker imports could drag on output the rest of the year.

US GDP GROWTH (QUARTER OVER QUARTER)

US GDP Growth Chart (QoQ)

While the latest IMF World Economic Outlook report indicated a 0.3% upward revision to its 2019 US GDP growth forecast, the organization highlighted that domestic demand was somewhat softer than expected and the aforementioned developments point to slowing momentum.

That said, recent US nonfarm payroll data, retail spending and durable goods orders data provide hope for the economy to rebound later this year. The improvement in economic data over the last month is also reflected by the Citi Economic Surprise Index rising substantially.

US ECONOMIC DATA SURPRISE INDEX (CITI)

US Economic Surprise Index Price Chart

If Friday’s US GDP report does in fact surprise to the upside – or the closely watched components show improvement – the Federal Reserve (Fed) could find itself in a difficult position with little economic evidence supporting an interest rate cut at next week’s July FOMC meeting.

Markets have priced in lofty rate cut bets, driven largely by slowing global GDP growth and trade policy uncertainty, which could see a sharp repricing if a robust GDP report crosses the wires and provides the Fed with another reason to not capitulate.

FED INTEREST RATE PROBABILITIES (JULY FOMC MEETING)

Fed Rate Cut Probability Chart July 2019

Currently, overnight swaps are pricing in a Fed rate cut next week as a near certainty with the probability of a 25-basis point reduction sitting at 84.5% whereas the probability of a 50-basis point reduction resting at 15.5%. If Friday’s Q2 US GDP data comes in better than expected, the probability of a 0.5% cut to Fed’s policy interest rate could be priced out by markets which poses an upside risk to the US Dollar.

Conversely, a downbeat Q2 US GDP report could encourage markets to anticipate a more aggressive ‘insurance cut’ from the Fed and would likely drag the greenback lower.

US DOLLAR INDEX PRICE CHART: DAILY TIME OCTOBER 30, 2018 TO JULY 25, 2019)

DXY US Dollar Index Price Chart Technical Analysis

For in-depth USD technical analysis, check out the latest US Dollar Price Action Setups from DailyFX Currency Strategist James Stanley.

Even though Friday’s GDP data report is a high-impact event listed on the economic calendar, currency option traders are downplaying its impact on the US Dollar seeing that DXY overnight implied volatility trades right at its 12-month average.

US DOLLAR OVERNIGHT IMPLIED VOLATILITY

US Dollar Implied Volatility Ahead of Q2 US GDP Data Release

The table above is a list of closely monitored USD currency pairs and their respective overnight implied volatility readings as well as estimated trading ranges. Using the derived implied volatility from at-the-money overnight currency option contracts, the implied trading range can be calculated with a 68% statistical probability (i.e. 1-standard deviation move in spot).

FOREX TRADING RESOURCES

  • Download our US Dollar Forecast for comprehensive fundamental and technical outlook
  • New to trading or simply looking to brush up on the basics of forex? Download this free educational guide on Forex Trading for Beginners
  • Find out how IG Client Sentiment can be used to identify the bullish and bearish biases of forex traders and reveal potential forex trading opportunities

- Written by Rich Dvorak, Junior Analyst for DailyFX

- Follow @RichDvorakFX on Twitter

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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