Dollar’s rally continues in early US session after release of much strong than expect GDP data. In Q2, GDP grew at 4.0% annualized rate, the highest level since Q3 of 2013, and beat consensus of 3.1%. The solid gain more than offset Q1’s -2.1% contraction, upwardly revised from prior estimate of -2.9%. The economy grew at about 1% pace for the first half of 2013. The GDP report overshadowed the disappointing ADP employment report, which showed 218k growth in private sector jobs comparing to expectation of 241k. Released from Canada, IPPI dropped -0.1% mom in June while RMPI rose 1.1% mom.
The dollar index surges in response to the GDP data and hits as high as 81.465 so far. Just shy of 81.48 key resistance. Based on current strong momentum, 81.48 would likely be firmly taken out. And, that would confirm reversal of the trend from 2013 high of 84.75. More importantly, the dollar index would declare victory in defending the long term fibonacci level at 50% retracement of 72.69 to 84.75 at 78.72. And that would also set up for a test on 84.75 key resistance in medium term.
Focus will turn to FOMC rate decision next. Fed is expected to taper the asset by another USD 10b, leaving the program at USD 25b per month. As usual, the reduction should be split evenly between treasuries and MBS. Overall, Fed is on track to end the QE3 by the end of October. FOMC should maintain the forward guidance that rates will stay low for a period of time. But the focus is on whether FOMC members are convinced that the economy is already in sustainable recovery. Also, Fed’s view on whether inflation is still expected to run below the target would be watched.
Elsewhere, German CPI decelerated to 0.8% yoy in July. Eurozone confidence indicators were slightly better than expected in general. Swiss KOF leading indicator dropped to 09.1 in July while UBS consumption indicator rose to 2.06. New Zealand building permits rose 3.5% mom in June, Japan industrial production dropped -3.3% mom in June.
Japan’s economic data released over the past 2 weeks underscored the downside risks to the economic and inflation outlook of the world’s third largest economy. It has also raised the uncertainty of the BOJ’s monetary policy going forward. The BOJ introduced ‘Quantitative and Qualitative Monetary Easing’ (QQE) in April 2013 to achieve the inflation target of 2%, with a time horizon of about two years. The program would be an open-ended one beyond 2014. We expect to see more guidance from the central bank in the October meeting regarding future stimulus measures in light of the current economic backdrop. More in Weak Economic Data Unlikely Triggers BOJ To Intensify Stimulus.
Daily Pivots: (S1) 1.3393; (P) 1.3418 (R1) 1.3434; More….
EUR/USD’s fall accelerates to as low as 1.3369 in early US session and break mentioned 61.8% projection of 1.3993 to 1.3502 from 1.3700 at 1.3397 target. Intraday bias is remains on the downside. Current fall should now target 100% projection at 1.3209 next. On the upside, above 1.3415 minor resistance will turn bias neutral and bring recovery. But upside should be limited by 1.3502 support turned resistance and bring fall resumption.
In the bigger picture, overall price actions from 1.6039 is viewed as a corrective pattern. One interpretation is that fall from 1.6039 to 1.2329 was the first leg. Price actions from 1.2329 were the second leg, in form of a triangle. In such view, the fifth leg of the triangle pattern could have completed at 1.3993 already. In other words, the decline from 1.3993 is resuming the fall from 1.16039. Medium term outlook will now stay cautiously bearish as long as 1.3700 resistance holds. Break of 1.2755 key support level will raise the chance of an eventual break of 1.1875 low.
Building Permits M/M Jun
Industrial Production M/M Jun P
UBS Consumption Indicator Jun
KOF Leading Indicator Jul
Eurozone Economic Confidence Jul
Eurozone Industrial Confidence Jul
Eurozone Consumer Confidence Jul F
Eurozone Services Confidence Jul
Eurozone Business Climate Indicator Jul
German CPI M/M Jul P
German CPI Y/Y Jul P
ADP Employment Change Jul
GDP (Annualized) Q2 A
GDP Price Index Q2 A
Industrial Product Price M/M Jun
Raw Materials Price Index M/M Jun
Crude Oil Inventories
FOMC Rate Decision