US Dollar: 2Q US GDP Data May Outshine FOMC in Driving Volatility

Talking Points:

• Euro to Continue Lower if German CPI Data Falls Short of Expectations
• 2Q GDP Data May Outshine the FOMC in Driving US Dollar Price Action
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July’s German CPI figures headlines the economic calendar in Europe. The year-on-year inflation rate is expected to fall to 0.8 percent, the lowest since February 2010. Price-growth data from the Eurozone’s top economy has increasingly underperformed relative to expectations recently, opening the door for a downside surprise. The latest PMI figures underscore this possibility, showing private-sector firms marked up prices by the least in three months in July. A soft result may boost ECB stimulus expansion bets, weighing on the Euro. We remain short EURUSD.

In the US, the first portion of the week’s pivotal event risk begins to emerge with the FOMC monetary policy announcement and the second-quarter GDP reading. Janet Yellen and company appear determined to continue tapering QE until the program is wound down in October. That much is probably priced in already, with the markets now focused on the length of the time gap between the end of asset purchases and the first interest rate hike.

That means familiar cautious optimism may not yield much in terms of volatility, putting the GDP figure in the driver’s seat. The annualized growth rate is seen printing at 3 percent after a dismal 2.9 percent drop in the prior period. Supportive news-flow arguing for stimulus to be withdrawn relatively sooner than the second half of 2015 – seemingly the markets’ baseline scenario – is likely to boost the US Dollar and may force a selloff across sentiment-sensitive assets. Needless to say, a soft result may trigger the opposite dynamic.

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--- Written by Ilya Spivak, Currency Strategist for DailyFX.com

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