Strong economic growth during the second quarter of this year, reaching a rate of 2.4% according to data released on Thursday, supported the dollar against a basket of currencies. The economic data released yesterday indicated an acceleration in the growth of the U.S. economy, showing a 4.7% increase in durable goods orders and an unexpected decrease in the trade balance deficit from $91.9 billion to $87.8 billion.
Additionally, the data showed a decline in weekly jobless claims to 221,000, down from the previous 228,000. The U.S. dollar rose by 0.65% on Thursday after the strong U.S. economic growth was confirmed, and the dollar index also increased today.
Performance of financial markets
The euro fell to $1.09, especially after the European Central Bank’s decision yesterday. The ECB decided to raise interest rates by 25 basis points as expected, but the statements of the ECB President and the interest rate statement were less hawkish than the markets had anticipated.
The British pound also declined against the U.S. dollar to $1.27, with the markets closely watching the Bank of England’s decision next week.
Today, the Bank of Japan’s decision was announced, and the interest rate was kept within its negative range at -0.10%.
The Japanese yen traded in a wide range against the dollar, fluctuating between 141 yen and 138 yen per U.S. dollar.
With the rise in the U.S. dollar after the data showed strong U.S. economic growth, gold prices declined to touch a low of $1942 per ounce yesterday before partially recovering to trade at $1950 today.
U.S. stock markets reacted negatively to the data showing strong U.S. economic growth. The highly positive data may increase the possibility of the U.S. Federal Reserve implementing another interest rate hike this year, putting pressure on stocks.
Yesterday, the Dow Jones index fell by 0.67%, and the NASDAQ technology index dropped by 0.55%.
The broader S&P 500 index, also declined by 0.64%.
The performance of Asian stock indices varied, but U.S. stock index futures managed to achieve some gains.
Oil prices benefited from the appearance of strong U.S. economic growth, and Brent crude oil futures rose within the range of $83 per barrel.
Important U.S. inflation data today.
Following the release of economic data showing strong U.S. economic growth yesterday, the markets are anticipating the release of inflation data today.
The U.S. Federal Reserve relies on the Core Personal Consumption Expenditures Price Index (Core PCE) as a measure of inflation, rather than the Consumer Price Index (CPI) used by most other central banks.
The Core PCE index is a gauge used by the Federal Reserve during the tightening of monetary policies.
Since the beginning of its tightening cycle in the first quarter of 2022, the Federal Reserve has raised the interest rates by 525 basis points.
The highest value of the Core PCE index, which prompted the Federal Reserve to implement consecutive and significant interest rate hikes, was 5.4% in February 2022.
Therefore, it can be noted that the decline of the index from 5.4% to 4.6%, according to the latest reading, is a relatively slight decrease.
It is worth noting that during the aggressive monetary tightening cycle carried out by the Federal Reserve, the index declined to 4.6% in December 2022 and has since remained around that level.
Market expectations suggest that the index will show a decline from 4.6% to 4.2%, reaching its lowest value since the third quarter of 2021.
How will the inflation data impact the markets?
After economic data showed strong U.S. economic growth, attention will now focus on inflation data according to the Core PCE index.
The impact of this data can be related to the following scenarios:
If the value is below 4.2%, we may observe a tangible decline in the dollar and an increase in stock and gold markets. Values below 4.2% would also increase the likelihood of the Federal Reserve refraining from implementing further interest rate hikes.
On the other hand, if the result unexpectedly comes in at 4.6% or higher, we may see a tangible increase in the dollar accompanied by a decrease in gold and stock prices. Values at 4.6% or higher might lead to the Federal Reserve implementing new interest rate hikes.
Values above 4.2% and below 4.6% might cause market fluctuations. In such a case, the closer the reading is to 4.2%, the potential impact on the dollar might lean towards negativity, but with fluctuations. Conversely, the closer the value is to 4.6%, we might observe a tendency towards positivity in the dollar, also accompanied by fluctuations.
The interpretation of economic data may take some time, and there are other factors that can influence the movement of the dollar, gold, and stocks. However, in these predictions describing the movement after the release of the data, all other fundamental conditions have been neutralized, and the explanation is based on the usual impact of economic inflation data.
It is also possible to understand the impact of the data on Federal Reserve interest rate expectations through the official CME website, which is provided through the link (here).
Currently, financial markets anticipate an 80% probability that the Federal Reserve will maintain interest rates in September, as of 07:26 AM GMT. Moreover, there is a 66.2% probability of no further interest rate hikes this year, with a 7.5% possibility of a rate cut.
Changes in these probabilities may have a tangible impact on the dollar, gold, and stocks.