USD: Oversupply of FX drivers – ING

The US GDP report for the second quarter came in stronger than expected yesterday, ING’s FX strategist Francesco Pesole notes.

DXY to trade on the soft side and re-test 104.0

“Growth was a solid 2.8% and core PCE slowed from 3.7% to 2.9%, above the 2.7% consensus. That implies that the June PCE deflator will be 0.28% MoM today, which seems unlikely based off the inputs from CPI and PPI. So we suspect it will also involve upward revisions to the previous couple of months. The consensus is for 0.2% MoM.”

“A stronger GDP/PCE would have sent shockwaves across the FX markets and boosted the dollar in other market conditions. But yesterday's reaction consisted only of a short-lived and modest dollar rally. We think there are two reasons for that. First, US macro is not currently the main FX driver, or at least there is an unusual abundance of drivers.”

“Second, markets have made a conviction call on Fed easing, and yesterday’s figures did not cast serious doubts on the disinflationary path. The Dollar Index (DXY) is benefitting from the low volatility of the Euro and remains an inaccurate benchmark of current dollar conditions. Today, a core PCE at 0.2% MoM could anyway help it trade again on the soft side and re-test 104.0.”