On Friday, the DXY closed at 93.34, a new low for the year. It was driven down by U.S. Q2 GDP data which failed to wow traders and the failure of the healthcare bill to pass in the Senate. GDP came in at 2.6% which more or less met expectations, but many market participants had been looking for an upside surprise. Meanwhile, the Q1 GDP was revised down to a dismal 1.2%. Separately, wage growth was measured at 0.5% by the Labor Department in the second quarter, down from the first quarter’s 0.8%. This inflation data can only give the Federal Reserve pause as it considers raising interest rates for the third time this year in its coming meetings. An increased concern with inflation can be seen in the statement following last Wednesday’s FOMC meeting in which inflation language was changed in what many considered to be a dovish manner.
The dollar’s drop was further precipitated by the failure of the “skinny” Obamacare repeal to pass on the Senate floor very early Friday morning. Mitch McConnell was then forced to pull the bill from the floor and move on to agenda items further down the line. The deciding vote was cast by Senator John McCain who urged senators from both sides of the aisle to take the bill back to committee for further debate and total overhaul. The failure of Obamacare repeal has thrown the entire pro-growth agenda of the Trump administration into question. Things will not get any easier from this point on as Congress must negotiate a budget, debt ceiling increase, and potentially a tax reform bill. Optimism surrounding such an agenda, which was rampant at the start of the year, has all since dissipated.
Currencies such as the euro and pound, which have already enjoyed success against the dollar so far this year, surged on Friday as the lackluster data compounded the negativity started by the Congressional gridlock. The euro in particular finished up 0.63% on Friday at 1.1749, bringing its year to date gains against the dollar to around 11%. As expectations for the ECB to begin winding down its asset-purchasing program increase, the euro looks poised for further gains.
The dollar appears to have suffered further setbacks over the weekend as well. North Korea performed its twelfth missile test this year in a direct provocation of the United States and Western institutions. The missile, which was a great improvement on past launches, was estimated to bring U.S. cities such as Los, Angeles, Denver, and Chicago within range of its destruction. In response, the U.S. flew supersonic B1 bombers from its airbase in Guam over the Korean Peninsula in a show of force. Increased saber rattling between the two nations, combined with aggressive rhetoric from both sides, has done nothing to reassure markets.
For the week to come, in addition to shouldering geopolitical tensions, the dollar must navigate a busy calendar including a Reserve Bank of Australia meeting, Eurozone GDP data, a Bank of England meeting, and U.S. July jobs data. If last week’s reaction to the U.S. GDP data was any indicator, the market seems poised to sell the dollar lower on any data weakness or hawkish foreign central bank policy. The RBA will look to navigate a careful middle ground as the Aussie has appreciated significantly already this year against the dollar and any further appreciation may inhibit growth. The Bank of England is up in the air with regards to interest rate policy, but the possibility exists for a rate hike despite growth concerns as Brexit negotiations continue. Finally, any weakness in the U.S. job’s data could give the Fed further concern regarding a third rate hike this year. Such concern would certainly drive the dollar lower, especially against the euro. Overall the USD faces many potential pitfalls in the coming week, and more likely than not, will end this coming Friday lower than its open on Monday.