US dollar strengthens for second straight day after GDP data supports minor Fed rate cut

US Dollar strengthens: USA Dollar On Thursday, the dollar gained for a second day in a row, boosted by data indicating that the US economy expanded faster than expected in the second quarter. This slightly tempered expectations of a 50 basis point rate cut by the Federal Reserve next month. Analysts noted that the report also raised hopes that the US could avoid a recession or experience only a mild slowdown. Following the release of the data, the dollar rose to a one-week high against the yen, hitting 145.55 yen before settling at 144.77 yen, marking a 0.1 percent increase. The dollar/yen pair, which is highly sensitive to economic projections, usually aligns with two-year US Treasury yields. Against the euro, the dollar also strengthened, with the euro falling 0.4 percent to $1.1077. This week, the euro has fallen 1.04 percent, its biggest weekly drop since early April.

GDP enhanced growth

The latest data revealed that the United States GDP GDP grew at an annualized rate of 3.0 percent in the second quarter, according to the Bureau of Economic Analysis’ revised estimate. This marked an improvement from the previous figure of 2.8 percent and was an improvement from the 1.4 percent increase recorded in the first quarter. Economists had expected GDP growth to remain at 2.8 percent. In a separate update, jobless claims fell by 2,000 to a seasonally adjusted 231,000 for the week ended August 24. This was slightly lower than the 232,000 claims anticipated by economists. The number of people still receiving benefits, a measure of ongoing unemployment, rose by 13,000 to 1.868 million, a figure reminiscent of late 2021. “The data supports our expectation of a 25 basis point cut rather than 50,” said Vassili Serebriakov, a currency strategist at UBS in New York. U.S. rate futures now reflect a 35 percent chance of a 50 basis point rate cut next month, down slightly from the 37 percent chance seen the day before, according to LSEG calculations. The market is also pricing in roughly 102 basis points of cuts by the end of 2024. Dollar The index rose 0.3 percent to 101.35 following the GDP and jobless claims reports, marking a weekly increase of 0.6 percent and setting it up for its most significant weekly rise since early April.

End of month dynamics

“He Dollar “The dollar has been gaining ground on the back of month-end flows. We can expect this trend to continue,” said Brad Bechtel, global head of FX at Jefferies in New York. “The dollar index was previously oversold below 101. I anticipate it will move towards the 103-104 range, but the upcoming labor market report will be crucial.” As the end of the month approaches, investors typically rebalance their portfolios, which can lead to buying back assets like the dollar that were previously sold. In August, the dollar fell 2.7 percent, on track for its biggest monthly drop since November 2023. “We think the dollar sell-off has been excessive, although the reasons are clear given the approaching rate cuts by the Fed,” UBS’s Serebriakov noted.

PCE data is anticipated

Investors now await the release of the U.S. personal consumption expenditures (PCE) price index on Friday, the Federal Reserve’s preferred gauge of inflation, which could offer further insight into the expected rate cut in September and the pace of future easing. In the eurozone, the euro fell to a 10-day low of $1.1059 after hitting a 13-month high of $1.1201 on Friday. The euro’s fall was attributed to inflation data from Germany and Spain, which fueled expectations of a rate cut by the European Central Bank. Inflation rates in six key German states fell in August, suggesting a possible slowdown in national inflation this month, while Spain recorded its slowest inflation rate in a year.

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