Forex
Currency market today: U.S. GDP report may shift the balance of power on the currency market in favor of dollar buyers
What is happening on the currency market? Pretty strong U.S. economic growth data might turn the bullish market for risky assets, which are in good demand after yesterday’s meeting of the U.S. Federal Reserve.
However, it could also be the case that the dollar will further sag against the euro and British pound, as the US economy may have shown modest growth in the second quarter of this year, interrupting the likelihood of consecutive quarterly contractions. Obviously, even if we do see growth, it will be quite weak, which will definitely raise fears of a possible further downturn in the foreign currency market.
Open currency market — what to expect?
Economists expect U.S. gross domestic product to grow at an annualized rate of 0.4% in the 2nd quarter of 2022. On the face of it, that would seem to be an improvement after the 1.6% decline in GDP in the first quarter. However, a breakdown of GDP for the second quarter could illustrate a more worrisome decline in consumer demand, the main driver of economic growth. This will have a major impact on the currency market today.
Whereas in the first quarter the slowdown was mainly due to growth in imports, and consumer spending was more moderate, things have changed; in the second quarter: the undoubted contribution to GDP growth will come from a reduction in the trade deficit, but consumer spending will probably shrink, which is pretty bad for the future prospects of the economy.
Clearly, because of the sharp rise in inflation, everyone expects consumer spending to shrink. Recent quarterly reports from major U.S. retailers such as Walmart Inc. and Target Corp. indicate serious concerns as consumers are already cutting spending, especially on high-priced items.
Current currency market news and analysis
A decline in business investment, a weakening housing market amid rising interest rates and slower inventory growth will also have a negative impact on the pace of GDP growth in the second quarter. Recent data showed that the merchandise trade deficit narrowed more than expected in June, and inventories in both retail and wholesale stores rose significantly.
Consumer spending, the main engine of the U.S. economy, will be the most important part of the report for many economists. Spending is projected to slow further to a 1.2% annualized rate, which will be the weakest growth rate for the year. Inflation-adjusted spending is likely to have declined in May from the previous month, and spending in June is not expected to be revised.
Currency market analysis: Impact of the U.S. GDP report
Experts say the economy may grow just enough to avoid an economic slowdown for two consecutive quarters, which is the common practical definition of a recession. Economists’ forecasts vary widely. About a third said GDP is down, including Bank of America Corp. and Deutsche Bank AG.
Estimates range from a 2.1 percent drop to a 2 percent increase. The National Bureau of Economic Research has already made an official statement about the onset of the recession. Economists from the bureau define a recession as a significant decline in economic activity that spreads throughout the economy and lasts for more than a few months.
Even if the report shows GDP growth, fears that inflation will continue to rise and the Federal Reserve will raise interest rates to curb it will eventually lead the economy into recession. Yesterday, policymakers raised the key rate by 75 basis points, to 2.5%, at the end of a two-day committee meeting, and said they expect “steady further increases.”
It is hard to say how all of these circumstances will affect the money market balance going forward, but clearly the GDP report will not go unnoticed.
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According to a report from the U.S. Treasury Department, the U.S. budget deficit in February was $262,434 billion compared to a $38.8 billion deficit in January. The Dow 30 also had problems.
Analysts at DailyFX suggested that the nation’s budget deficit for February was expected to be $256 billion. A year earlier, in February, the U.S. posted a budget deficit of $216,590 billion.
According to the GAO report, U.S. government spending rose 3.5 percent year over year last month to $524.548 billion, while revenue, in contrast, declined 9.5 percent to $262,114 billion.
Earlier, the U.S. edition of the Washington Post published an editorial stating that the new draft budget proposed by the Biden administration undermines U.S. national security and its ability to invest in the future, because it suggests a further growth of the U.S. national debt.
The WP editorial board noted that the new draft budget assumes a $2 trillion budget deficit, including due to the high cost of providing health insurance to the elderly of the baby boomer generation.
Earlier we reported that the EU has agreed to reduce energy consumption by 11.7% by 2030.
The European Union has agreed to reduce the bloc’s energy consumption by 11.7 percent by 2030, Reuters reported.
“This will mean a real change in favor of the climate and to the detriment of Putin,” the Danish Niels Fulsang, the European Parliament’s lead negotiator, told the agency.
Initially, in 2021, the EU proposed to reduce consumption by 9%, but in May 2022, against the background of events in Ukraine, increased the target to 13% to quickly abandon Russian energy, writes Forbes. The European Parliament considered it necessary to reduce consumption by 14%. The DAX Index also had problems.
Some EU countries have continued to insist on a 9% cut. An all-night negotiation between the EU and the European Parliament resulted in a compromise: the energy consumption of EU end-users, such as households and businesses, must be 11.7 percent lower than expected in 2030.
The agreement must pass final approval by the European Parliament and EU countries before it can become legally binding.
Earlier, we reported that consumers expect lower inflation in the eurozone, higher wages.
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