US GDP was released and while the 2nd quarter GDP (Gross Domestic Product) saw a lower than expected release of 2.3% when compared with a forecasted value of 2.5%, the US dollar still traded higher on the news. The reason for that comes from the fact that the first quarter GDP was revised higher into the positive territory after the initial release was below the zero mark. And just like that, from a miss in the 2nd quarter release we had a revision for the first quarter and the US dollar started to be bought all over the dashboard.
Government will start to revise previous GDP revisions
To be honest it is worth mentioning the fact that after the FOMC (Federal Open Market Committee) statement this week the US dollar was exiting the release on a strong foot with EURUSD moving lower while USDJPY and USDCAD moved higher. Coming back to the GDP revision, it seems to be a trend lately as the Government is looking at how the data was calculated and started to revise previous releases that took place in the last 3 years.
ZIRP To Create More Problems Than Benefits
We know by now that ZIRP (Zero Interest Rates Policy) is active in all major economies around the world. It started in US with the Quantitative Easing (QE) programs, then Japan and Eurozone followed, and UK did the same with their Asset Purchase Facility program. In theory, all these programs are doing the same thing: central banks are buying their own government bonds and the idea is to create inflation while central bank’s balance sheet is increasing. The problem is that by the first time the Federal Reserve in the United States started the QE program it recognized these are uncharted territories for modern economy and capitalism and we don’t really know the outcome of it.
Rates in US are going to raise
Federal Reserve in the United States is preparing to raise rates for the first time in years but still needs to see more gains in the jobs market. I would say it is not the unemployment rate that should be on focus but the labor participation rate which is shrinking and shrinking and this means in plain English that there are fewer people that are employed and they need to provide for a bigger number of people than in the past. This is translating into a problem for any economy that wants to grow at a healthy pace and this may be the reason why the Fed is not going to hike in September.
Fed Rate Hike Seen In September
The FOMC (Federal Open Market Committee) statement brought nothing but more confusion into a market that was already in summer trading mood as the actual statement was highly anticipated by traders. However, the US dollar did move on the release but the only thing that mattered was that the Fed did not hike the rates. Focus is shifting now on September as a possible rate hike date especially that the FOMC meeting is being followed by a press conference and this way the Chairwoman, Mrs. Yellen, has the possibility to further explain their decision. I would say it is mainly about the improvements in the job numbers that is the key until then and that is making the two NFP (Non-Farm Payrolls) releases vital for the September hike.
Commodities Still Suffer
The main theme on the commodity markets was Gold as it fell out of cycle when broke the 1100 mark to a five and a half years low and now the focus is turning on the round number, the 1000 level. As a consequence, the AUDUSD and USDCAD pairs were traded heavily with the USDCAD making last Friday a move above 1.31 but only to be sold into the 1.28 handle. The AUDUSD moved for more than fifteen trading days now and this makes trading this pair difficult. However, I am bullish on it and it means call options with end of month are still in place.
End Of Month Flows To Kick In
End of this week will be a pretty hectic one as end of month is this coming Friday on the 31st of July and flows and regular options that are being rolled over will influence trading. Usually such an environment is a pretty difficult one to trade as focus is on closing positions and opening new ones but this does not make it impossible. The longer expiration dates now valid are end of month and this is a problem for new trades. The idea is to trade now in these days left until end of month shorter expiration dates. On the medium to long term I am still favoring a higher EURUSD and lower USDJPY, while AUDUSD should find a base as well.
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