DXY: GDP declined in the 2nd quarter. Now what?
Due to the inertia received from the negative momentum of the last week, the dollar continues to decline at the beginning of the new week. At the time of this article's publication, DXY dollar index futures were traded near 105.26, 50 pips below last week's close.
If the decline continues, it will be the 3rd consecutive week of dollar weakening, and after the breakdown of the local support level 105.00, DXY may head towards the support level 103.50.
So far, pessimism about the prospects for the US economy has prevailed after the publication last week of a disappointing report by the US Bureau of Economic Analysis with data on the country's GDP for the 2nd quarter. According to preliminary estimates, in the 2nd quarter, GDP again decreased (by -0.9%), following a fall in the 1st quarter (by -1.6%).
It seems that Fed Chairman Powell's statements, made during a press conference following the Fed meeting ended last Wednesday, that the further course of the monetary tightening cycle will be accompanied by a period of "lower economic growth, weakening of the labor market", and in the central the bank expects "a period of economic growth below the trend", are beginning to gain ground for implementation.
By all indications, this is a recession. If so, tightening monetary policy by raising interest rates in a recession is suicidal.
“It is possible that before the end of this year, the Fed will again have to move from tightening to easing its monetary policy. Moreover, during the primary elections to the US Congress (in early November), Biden and the Democrats will have to somehow explain the sharp deterioration in the economic situation in the United States. If the Fed really has to slow down the process of tightening its policy or even reverse this process, then a new cycle of falling dollar cannot be avoided,” we wrote in one of our recent reviews.
Now market participants will be waiting for the publication on Friday (at 12:30 GMT) of the monthly report of the US Department of Labor with data for July.
The labor market so far remains the only bright spot in the deteriorating economic situation in the US economy. If everything turns out to be bad here, then we should expect a further fall in the dollar and its DXY index.
However, volatility in the market and in dollar quotes will increase today, when the Institute for Supply Management (ISM) manufacturing business activity index (PMI) is published at 14:00, which is an important indicator of the state of this sector and the American economy as a whole. The indicator is expected to fall (to 52.0 from 53.0 in June). Despite the fact that the indicator is above the value of 50, which separates the growth of business activity from the slowdown, its relative decline could put significant pressure on the dollar after the release of negative data on GDP last Thursday. Even a relative decline (with a good value) can scare investors and increase pressure on dollar buyers.
In an alternative scenario, the dollar will return some of the positions it lost earlier. A consistent breakdown DXY local resistance levels 106.00, 107.00, 108.00 will significantly increase the positive mood of dollar buyers. A break of the recent high at 109.14 will fully resume the uptrend of the DXY and the dollar.