U.S. Dollar At Crossroads After GDP Misses Expectations

Key Insights

• U.S. GDP declines for the second quarter in a row, which means that the country is in a technical recession. 
• U.S. dollar is losing some ground after the release of the GDP report as traders bet that the Fed will be less hawkish at the next meeting. 
• A move below the key support at 106 will provide the U.S. Dollar Index with an opportunity to gain significant downside momentum. 

U.S. Dollar Moves Lower After Shocking GDP Report

The U.S. has just released the second-quarter GDP Growth Rate report, which indicated that GDP declined by 0.9% quarter-over-quarter. Analysts believed that GDP would grow by 0.5%. Put simply, the U.S. is in a recession as GDP declined in two quarters in a row.

The U.S. Dollar Index has started to move lower after the release of the report as traders bet that weak GDP numbers will limit Fed’s appetite for higher interest rates.

Yesterday, the Fed raised the rate by 75 bps and promised to fight inflation, although the message was not too hawkish. Today’s GDP report highlights recession risks, so the situation is developing according to the dovish scenario that we discussed yesterday.

Right now, the markets are pricing in a 76% probability of a 50 bps hike at the next Fed meeting. This hike would put the target rate into the 275 – 300 bps range. However, the situation is developing quickly, and Fed’s actions will greatly depend on the situation in commodity markets, which have a direct impact on inflation.

Fed’s Current Game Plan Is Under Question

In addition to rate hikes, the Fed is selling assets to decrease the size of its balance sheet. These sales can be tweaked in case the economic situation worsens.

Put simply, the Fed can deliver a modest rate hike at the next meeting, combined with a reduction of an asset sale program. This scenario will be bearish for the U.S. dollar and bullish for riskier assets.

From a big picture point of view, the U.S. Dollar Index is stuck in a wide range between the support at the 106 level and the resistance at 107.50. In case the U.S. Dollar Index manages to settle below 106, it will develop downside momentum and head towards the 50 EMA at 105.20, which will be bullish for EUR/USD and GBP/USD.

At first glance, it looks that there are enough catalysts to push the American currency to lower levels. However, traders should keep in mind that the situation in the Euro Area will be much worse than in the U.S. in the second half of the year due to the energy crisis in the EU. In case the U.S. Dollar Index manages to stay above the 106 level, it will have a great chance to start a new upside trend and get closer to the yearly highs near 109.30.

For a look at all of today’s economic events, check out our economic calendar.