The US Dollar (USD) trades steady and sideways this Thursday ahead of the first major central bank rate decision for 2024. All eyes will be across the Atlantic Ocean on the European Central Bank (ECB) with a rate decision and later comments from the ECB President, Christine Lagarde. It was only last week that Lagarde said that the summer might be a good moment to cut rates for the first time. Now traders will want to hear that phrase committed in the press conference as a global view from the ECB’s governing council, making it the bank’s official forward guidance.
On the economic front, traders will need to have their caffeine shots consumed by 14:15 GMT within just a range of 30 minutes, as not only the ECB rate decision will be released, but additionally a lot of US data. Of course US Gross Domestic Product (GDP) will steal a lot of thunder, but Durable Goods, US weekly unemployment data and New Home Sales will also need to get digested. All this will likely send the US Dollar onto a clear path higher or lower.
The US Dollar Index (DXY) is, from a purely technical point of view, caught between two very important Simple Moving Averages. Those are the 55-day SMA near 103.17 and the 200-day SMA at 103.50, which acts as the floor and cap respectively. To make matters even worse, the floor (55-day SMA) is heading lower by the day, which opens up more downside than upside potential for the US Dollar in the near term.
Given the big batch of data released, with the possibility the ECB drops the ball in its communication, there remains still a case for the DXY to get through those two moving averages again and run away. Look for 104.41 as the first resistance level on the upside, in the form of the 100-day SMA. If that gets breached as well, nothing will hold the DXY from heading to either 105.88 or 107.20 – the high of September.
With the declining floor, more sell pressure could filter through into the price action. Price action could decline substantially should the US data release later this Thursday build a case for that move. This would see the DXY first drop to 102.60, at the ascending trend line from September. Once below it, the downturn is open towards 102.00.
A country’s Gross Domestic Product (GDP) measures the rate of growth of its economy over a given period of time, usually a quarter. The most reliable figures are those that compare GDP to the previous quarter e.g Q2 of 2023 vs Q1 of 2023, or to the same period in the previous year, e.g Q2 of 2023 vs Q2 of 2022.
Annualized quarterly GDP figures extrapolate the growth rate of the quarter as if it were constant for the rest of the year. These can be misleading, however, if temporary shocks impact growth in one quarter but are unlikely to last all year – such as happened in the first quarter of 2020 at the outbreak of the covid pandemic, when growth plummeted.
A higher GDP result is generally positive for a nation’s currency as it reflects a growing economy, which is more likely to produce goods and services that can be exported, as well as attracting higher foreign investment. By the same token, when GDP falls it is usually negative for the currency.
When an economy grows people tend to spend more, which leads to inflation. The country’s central bank then has to put up interest rates to combat the inflation with the side effect of attracting more capital inflows from global investors, thus helping the local currency appreciate.
When an economy grows and GDP is rising, people tend to spend more which leads to inflation. The country’s central bank then has to put up interest rates to combat the inflation. Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold versus placing the money in a cash deposit account. Therefore, a higher GDP growth rate is usually a bearish factor for Gold price.