USD sparks back into life

Risk appetite is back on the table as investors cheered strong US economic data, whilst North Korea have become a distant memory. The finish in Europe yesterday was not quite so noteworthy, however the S&P booked its fourth straight positive close with tech stocks as standout performers.

US GDP & ADP Payrolls

The dollar is firmly back in fashion after the latest estimate of the second quarter GDP showed the US economy grew at the faster rate since 2015. US economic growth gathered pace, hitting 3% on an annualised basis, significantly above the 2.7% expected and the 2.6% from the first estimate. Interestingly the 3% percent growth, which was being targeted by President Trump occurred without any policy progress in Washington.

Another supportive factor for the dollar came from the ADP payrolls which smashed expectations.  The private payroll data is often viewed as a precursor to the Labour Department jobs data due on Friday, so we could see traders start to position themselves for another bumper non-farm payroll number.

The impressive GDP and ADP payroll reports have served to increase market hopes of one final interest rate rise in the US before the year is out. Market expectation for a hike by the end of the year is at 41%, strong numbers today and tomorrow could boost that percentage significantly higher.

US inflation

With the US economy is growing at a solid 3% and the jobs market is tightening, inflation should be ticking higher. Inflation seems to be the last piece in the Fed’s puzzle and so far it is not quite fitting the picture. Inflation in the US is not increasing at the pace that the Fed wishes to see. Today the personal consumption expenditures (PCE), the Fed’s preferred measure of inflation, is released and it is expected to come in at a rather lacklustre 1.4%, unmoved from the previous month. Should the PCE figure come through stronger than expected, then we could see fresh legs to the current dollar rally.

After suffering at the hands of investors over recent sessions the dollar is fighting back. The greenback is fast approaching the psychological level of 93 versus a basket of currencies, after having picked itself up off Tuesday’s low of 91.5, which was also its weakest value since May last year.

The strengthening dollar is also pulling the EUR/USD back into check. After having hit a two and a half year high of 1.2069 on Tuesday, dollar bulls have taken back control, pulling the rate down to its current level some 1.6% lower. Whether the EUR/USD manages to break through 1.1859 (10 sma), its immediate support, will also depend on inflation figures due from the eurozone this morning.

Eurozone Inflation

By using yesterday’s inflation figures from Spain and Germany as a guide, then we could expect to see an increase in eurozone inflation in August, as measured by the core price index, when its released today. Inflation for the bloc is expected to have ticked up from 1.3% in July to 1.4% this month. Whilst this is a step in the right direction, it is still some distance from the European Central Bank’s target of 2%. Even so, we still expect the ECB to start discussing the winding down of its current bond buying programme at the monetary policy meeting next week.

Eurozone unemployment

Other data of note this morning will be unemployment figures for the region, which also serves to highlight the economic divergences between the individual countries that the ECB sets policy over. Whilst unemployment in Italy is forecast to be 11.1%, the rate in Germany is expected to remain at a record low of 5.7%. The rate for the region as a whole is expected to come in at 9.1%, which is still above its pre-financial crash level and markedly higher than the US, at 4.3%. In short there is still plenty of room for labour market tightening across the region, although individual countries such a Germany could struggle to reduce unemployment further. Any signs that unemployment is shifting lower across the bloc could have a positive impact on the euro and send the common currency back towards 1.2069, its recent high versus the dollar.