Unexpected GDP Surge Triggers Dollar Rise, Market Reacts

As part of yesterday’s analysis, we analysed the Dollar and US stocks and how economic data can influence the price — specifically the US Gross Domestic Product and PCE Price Index. The US GDP data shocked markets as the data read 2.0%, considerably higher than the 1.4% previously expected. The price of the US Dollar shot up within a short time as investors leaned towards the Fed hiking interest rates by a minimum of 0.50%. The US Dollar Index rose from 102.81 to 103.41 within 120 minutes after the data was released.  The US Dollar rose against all currencies and continues to rise within this morning’s Asian session. 

The price movement was as indicated in yesterday’s market analysis and followed traditional fundamental theories. The stock market also mainly positively reacted despite the news indicating further hikes. The Dow Jones rose by 0.80%, the S&P 500 by 0.45%, but the NASDAQ declined by 0.45%. The stock market saw a relatively positive session despite the higher possibility of more hikes because the news indicates a healthy economy and lower recession risk. 

However, the real bullish price movement would come if the PCE Price Index read lower than 0.2-0.3%. This would indicate low recession risk, economic growth, and lowering inflation. The lower inflation factor may also sway the Fed towards one 0.25% hike instead of two. On the other hand, a higher PCE Price Index can dampen sentiment towards the stock market. 

EUR/USD - Expected GDP Surge Triggers Dollar Rise

The price of the EUR/USD is forming a Head and Shoulders pattern in the 4-hour timeframe, indicating a potential downward trend. In addition to this, the price is trading below the trend line and moving averages are crossed downwards. As a result, technical analysis is pointing towards a downward trend. However, the only element causing concern is the price is trading at a significant resistance level from last week. The main resistance level is at 1.08440, but bearish signals may strengthen if the price forms a breakout. 

EUR/USD 20-Minute Chart on June 30th 

Though investors should note that momentum-based indicators point towards a bearish trend, the price action will largely depend on this afternoon’s PCE Price Index. The bullish price movement is being triggered by strong order flow as investors look to take advantage of higher interest rates and US bonds. Investors are pricing into the market a 0.25% hike next month and a further hike towards the end of the summer or the beginning of autumn. Nevertheless, bullish investors hope the PCE Price Index will read higher than 0.3%. This would reaffirm that a more restrictive monetary policy is required, which is positive for the US Dollar. 

The Euro is also likely to continue being supported by further interest rate hikes; however, the effect is minimal as the Fed will match the European Central Bank’s alterations. The changes in the monetary policy are affecting the economy within Europe. The Unemployment Change in Germany may increase from 9,000 to 14,000, but analysts expect the Unemployment Rate to remain at 5.6%. However, analysts expect Italian Unemployment to rise to 7.9%. Throughout the week, the President of the ECB has been advising interest rates remain significantly higher than targets in most states and that rates are likely to continue rising “for some time”. 

Investors should note that it is vital to analyse the exchange rate as well as the performance of each currency individually. The Euro during this morning’s session has declined against all currencies. 

Dow Jones - Investors Focus on Today’s PCE Price Index

The Dow Jones was the best-performing index within the United States during yesterday’s trading. 8 of the 30 stocks ended the day lower, but only two stocks declined more than 1%. The best-performing stocks within the index were mainly in the banking sector. JP Morgan rose 3.49%, Goldman Sachs 3.01%, and Visa 2.79%. The worst-performing stocks were based primarily on the tech stocks and the defensive stocks category, for example, Walmart and Procter & Gamble. 

Dow Jones 30-Minute Chart on June 30th

As stated above, the stock market, in general, including the SNP500 and NASDAQ, will be hoping for a lower-than-expected figure from the PCE Price Index. Another positive development for the Dow Jones has been comments from members of the FOMC that have been very different from the Fed Chairmen’s forward guidance. For example, Raphael Bostic, Atlanta Fed President, is advising he favours keeping rates at 5.25%. Mr. Bostic is announcing the policy has only been affecting the economy for eight months and has a lagging effect. Therefore the policy should remain at 5.25% temporarily to monitor if inflation continues to fall before determining if further hikes are required. However, most economists believe the federal fund rate will rise to 5.50% at the end of July. Investors will be anticipating today’s PCE Price Index to determine which is a likely outcome.

The Dow Jones is forming a “swing style” bullish trend but hovers at the trend line on larger timeframes. Therefore, short-term traders will look for a breakout at $34,152 to speculate on a further price increase.

Summary:

• The US GDP data shocks markets by reading 2.0%, considerably higher than expectations. Investors price into assets a further two interest rate hikes. 
• Mr. Bostic is announcing the policy has only been affecting the economy for eight months and has a lagging effect. Therefore the policy should remain at 5.25% temporarily to monitor if inflation continues to fall.
• The Dow Jones was the best-performing index appreciating 0.80% due to the performance of stocks in the banking sector.
• A lower PCE Price Index reading can further support the US stock market. This would indicate a possible pause in the monetary policy while the economy grows.