GDP Surprise Lifts Dollar Index, BoJ Shocker Caps Gains

(RTTNews) - The U.S. dollar gained against major currencies during the week ended July 28 as higher-than-expected economic growth in the U.S. in the second quarter quelled the Fed-led weakness that followed the latest FOMC decision. The dollar rallied against the euro, British pound and the Australian dollar, but could not resist the yen's strength that followed the Bank of Japan's yield curve tweak. The decline in the Fed-preferred PCE inflation readings also capped the dollar's gains.

Advance estimates released on Thursday by the U.S. Bureau of Economic Analysis revealed the U.S. economy grew at 2.4 percent in the second quarter of 2023, versus 2 percent in the previous period and much more than 1.8 percent that the markets had anticipated. The stronger-than- expected GDP data from the U.S. rekindled fears of how the Fed would respond, given its proclaimed stance of a data-driven monetary policy action, fueling a rally in the dollar.

Close on the heels of the quarter percentage point rate hikes by the Federal Reserve and the ECB, the Bank of Japan on Thursday held rates steady but hinted at a flexible yield curve control policy. Though BoJ would continue to allow 10-year JGB yields to fluctuate in the range of around plus and minus 0.5 percentage points from the target level, it stated that in its market operations it would be regarding the upper and lower bounds of the range as references, not as rigid limits. The hawkish tilt in the Japanese central bank's action curtailed the dollar's surge.

Data released by the U.S. Bureau of Economic Analysis on Friday showed core PCE readings, declining to 4.1 percent in June, on a year-on-year basis. Markets had expected the reading to drop to 4.2 percent, from 4.6 percent earlier.

Currency markets remained choppy amidst the rate hikes and the economic data releases. The Dollar Index, a measure of the Dollar's strength against six currencies including the Japanese yen, ranged between a low of 100.55 touched on Thursday and the peak of 102.04 scaled on Friday. The index gained 0.62 percent during the week, rising to 101.70. from 101.07 a week earlier. The DXY is currently at 101.59.

The Dollar's strength reflected in the EUR/USD pair shedding almost a percent over the past week despite the ECB's widely expected 25-basis points rate hike. The pair closed at 1.1015 on Friday, versus 1.1123 a week earlier, amidst growing expectations of a pause by the ECB. The pair had touched a high of 1.1150 on Thursday and a low of 1.0943 on Friday. Despite indications of a decline in inflation in Germany as well as France, the pair is currently trading at 1.1042.

The British pound edged lower against the U.S. dollar during the week ended July 28. The GBP/USD pair closed the week at 1.2850 versus 1.2855 a week earlier. The week's trading range for the pair was between the high of 1.2997 touched on Thursday and the low of 1.2763 touched on Friday. The Bank of England is scheduled to announce its interest rate decision on Thursday. Amidst the anxiety, the GBP/USD pair is currently trading at 1.2866.

The Australian Dollar shed more than 1 percent against the Dollar, during the week ended July 28 amidst softer than expected CPI readings. Inflation in the second quarter dropped to 6 percent, from 7 percent in the previous period. Markets had priced in a reading of 6.2 percent. Hopes of stimulus measures from China or the IMF raising its global growth forecasts also did not suffice to lift the commodity currency. Amidst a weak retail sales reading, the AUD/USD pair closed at 0.6649, versus 0.6727 a week earlier. The antipodean currency ranged between a high of $0.6823 and a low of $0.6612 during the week. The Reserve Bank of Australia is scheduled to announce the next interest rate decision on Tuesday, and amidst the anxiety, the AUD/USD pair has now risen to 0.6734.

The Japanese yen gained close to half a percent against the U.S. dollar amidst anxiety triggered by the Bank of Japan's tweaking of its yield curve control policy. The USD/JPY pair closed at 141.15. versus 141.79 a week earlier. Amidst the BoJ's hawkish surprise, the pair ranged between 141.82 and 138.07. It is currently at 142.12.

With the divergence in monetary policy between various economies getting more pronounced, currency market volatility is bound to increase. While the Fed and the RBA are set to pause, the Bank of Japan is tilting its yield curve control policy to the hawkish side. ECB and BoE are torn between inflation combat and staving off a recession. The prospect of a soft landing for the U.S. that boosted risk appetite and diminished the safe haven appeal for the Dollar is also bound to sway currency market sentiment.