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The U.S. dollar continued to strengthen its advantage against risk assets, aided by decent U.S. reports.
Yesterday, the dollar reacted with gains to the U.S. data. According to the report, GDP in the second quarter grew by 1.5% year-on-year, slowing from 2.1% in the first quarter. GDP reflects the economy's growth rate and serves as a foundation for assessing its health. While the slowdown might typically raise concerns, the inflation portion of the report balanced the picture, with results that were moderately favorable for the Federal Reserve, albeit not outstanding. The PCE price index increased by 0.2% compared to last month. The core figure, excluding food and energy, also added 0.2%, while the annual PCE stood at 3.7% and the core at 3.3%. The core personal consumption expenditures index is considered the Fed's preferred measure of inflation, so the market pays special attention to it.
A key point was that all figures were within expectations, and the absence of surprises deprived the market of a reason for sharp movements. For the euro and the pound, the strengthening dollar translated into moderate pressure. Since the data matched forecasts, there was no significant sell-off of risk assets, and both European currencies retreated only slightly. The EUR/USD and GBP/USD pairs declined without sharp fluctuations, and their further dynamics will depend on whether market attention shifts to upcoming signals from the Fed.
In the first half of the day, attention to the euro will focus on data on private-sector lending in the Eurozone and changes in the M3 money supply. Following that, the European Central Bank will release the report from its monetary policy meeting. Private sector lending indicates how actively businesses and households are borrowing. At the same time, the M3 aggregate reflects the total amount of money in circulation, both helping to assess the state of money circulation and indirectly influencing rate expectations. Nevertheless, the key event will be the central bank's report.
The release of the minutes could spark volatility, as many are looking for more hawkish signals from the central bank, especially since the market has recently become increasingly convinced of an interest rate hike. If the document confirms the ECB's hawkish stance, the euro will gain support, and the EUR/USD pair could move upwards. Softer wording, on the other hand, will cool down sentiment, so the reaction will largely depend on the tone of the discussions within the central bank.
As for the pound, today's absence of fundamental reports from the UK in the first half of the day will allow it to stabilize after yesterday's sell-off. Without fresh figures on inflation, employment, or business activity, traders will have no reasons to reconsider their positions, and these indicators usually influence expectations regarding the Bank of England's rates and determine the direction of the British currency. However, given that the GBP/USD pair has already retreated under pressure from a stronger dollar following U.S. inflation data, the pressure on the pair may well persist.
If the data matches economists' expectations, it is better to act based on the Mean Reversion strategy. If the data is significantly higher or lower than economists' expectations, the best strategy would be to use Momentum.
*The market analysis posted here is meant to increase your awareness, but not to give instructions to make a trade.
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