U.S. GDP Show Record Contraction

07/31/2020 9:20 am EST

Focus: FOREX

Adam Button

Co-Owner and Managing Director, ForexLive.com

With markets still digesting the FOMC statement, they were hit with a record contraction of GDP, which hit the dollar, reports Adam Button.

The U.S. dollar weakness intensified Wednesday with Fed Chair Jerome Powell reiterating a dovish stance. The euro continued its run and was the top performer while USD lagged, but Thursday, the British pound (GBP) is the only gainer vs. the dollar as the greenback gets some month-end relief.

The first look at second quarter US GDP on Thursday showed the largest contraction on record, 32.9%. 

The was kneejerk reaction to the FOMC decision was on Powell warning that the pace of improvement in high-frequency indicators had slowed. That sparked a momentary drop in risk trades and a recovery in the U.S. dollar.

The other message was a strong reiteration of what we've heard before: That the Fed is prepared to do whatever is in its power to stimulate the economy during the pandemic. What was missing was anything specific about what that might entail.

Looking ahead, Fed watchers will await how the central bank uses forward guidance using inflation or unemployment.

In terms of overall price action, the trend was towards more US dollar weakness. The dollar-Swiss franc pair (USD/CHF) hit a five year low after the eighth straight day of declines. The euro has made another one-year high as it touched above 1.18.

As expected, the U.S. Dollar Index fell sharply on the record weak GDP number, thought number was better than the consensus estimate of -34.8%. Risks are a touch to the positive side because the advance trade balance was surprisingly strong on Wednesday.

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