Friday, July 27, 2018

Dollar and US stocks' outlook post US GDP release

  • Dollar
  • Stocks
  • Dow Jones

Written by Konstantinos Anthis, Rony Nehme, Hadi Rachid

Investors have been eagerly awaiting the release of the US GDP figures today. Everyone, including the White House, was closely watching today more than ever. Not because a single 3-month period of rising output is a gauge of the economy's health, but because this year's second-quarter number is one of the results of President Donald Trump’s "Pro-Growth Agenda". As expected, the economy's expansion topped 4%. The last time the economy expanded at a comparable pace was in 2014, when growth hit 5.2% in the third quarter.

Impact on the U.S. Dollar

Earlier today and prior to the release of the figure, the Dollar showed a bullish bias after being stable for a while hinting on a good GDP reading. Although the number didn’t turn out greater than expected, the Dollar still looks strong due to an epic GDP growth from 2.0% to 4.1%.

So, even though the first reaction from the greenback was bearish - as short-term focused bulls were hoping for a higher than expected figure - the broader trend for the Dollar points higher and this will put pressure on the higher beta currencies like the European majors and commodity dollars. The Euro looks weak at this point, 1.16 is the support and should this break then it clears the path for a further decline to 1.1550. Concurrently, the Pound holds above 1.31 but if this level gives in then the next area of support might be found 150 pips lower at 1.2950.


Impact on U.S. Stocks

Usually a better than expected GDP is considered good for the economy. Today’s figure showed a domestic performance in line with expectations but a significant increase from the previous GDP figure. Therefore, on this GDP release, a bullish move in U.S. stock market indices such as the Dow Jones Industrial Average should be expected for the next few days. The Dow Jones futures are currently pointing to a slightly higher open.

Furthermore, the market is still looking for a pickup in consumer spending after the first-quarter data reflected disappointing growth on that front. Now, we realize that there’s still another week left to go in July but excluding a huge collapse in the last two trading days of the month, this will mark the fourth straight monthly gain for the S&P 500.

DJ and SP

What's Next?

Looking ahead, we’re all waiting for the FOMC statement due next week and its outcome will be vital to the Fed policy going forward. Ultimately, it will be interesting to see how investors and policymakers will react to today’s stellar GDP reading next week. But at the same time, today's impressive printing could also trigger an increase in interest rates.

A reading so hot will definitely fuel expectations that the Federal Reserve may need to ramp up its pace of rate increases, with the possibility of a further two rate hikes in September and December tasked to slow down this overly hot growth. That could knock bond prices lower, conversely pushing rates up and pressuring equity markets lower as investors would worry about rising borrowing costs. So, even though July was a bullish month for US stocks, August might turn out to be completely different...