US Dollar Exchange Rates Looking Overbought

All-important economic growth data confirms the US economy continues to grow at an impressive rate and the dollar will ultimately benefit.

• Pound to dollar exchange rate =1.5566.
• Euro to dollar exchange rate = 1.0951.

Interest rate rises in September will all but be assured following the release of a strong GDP reading out of the United States.

Q2 2015 US growth ticked higher from Q1 2015 but missed expectations coming in at +2.3% versus the +2.5% estimate set forward by Bloomberg News. The prior Q1’15 GDP figure revised up to +0.6% from -0.2% (annualised) following a revision to the statistic bureau’s reporting methodology.

The strength in second-quarter growth largely reflected a strengthening in consumer spending, particularly for durable items, government spending rising, and net exports providing a small addition to growth after a sizeable reduction in the first quarter.

Market measures of interest rate expectations have continued to price in October to December as the most likely period for the Fed’s first rate hike, something that started developing post-FOMC yesterday.

The July GDP figures are an all-out pro-USD reading suggest RBC Economics who say the above-potential gain in GDP recorded in the second quarter, if sustained, is expected to return the Fed to tightening mode.

“Our forecast assumes that solid job gains in July and August will provide strong support for this pace to be maintained going into the second half of 2015. We expect it to prompt the Fed to initiate the first hike at the September 17, 2015 Federal Open Market Committee (FOMC) meeting raising the fed funds target range by 25 basis points to 0.25% to 0.50%,” says Paul Ferley, Assistant Chief Economist, RBC Economics.

USD May be Overbought

The rally higher in the dollar exchange rate complex no doubt has further to run.

However, in nearer-term timeframes there is the risk that we are witnessing over-bought conditions suggesting a pull-back could be due.

"While we are bullish dollars and believe that further gains are likely, there's just under 2 months to the next monetary policy meeting and the dollar is overbought.  Rather than chase the rally especially in USD/JPY we believe that we will have the opportunity to buy the currency pair on the 123 handle," says trader Kathy Lien from BK Asset Management.

Pound Sterling Faces Important Week

Of all the major currencies, sterling was the most resilient versus the U.S. dollar.

"It ended the day unchanged after having raced to a high of 1.5642. Technically, it looks like the currency pair could retest 1.55 but if that were to occur, it would only be due to U.S. dollar strength because fundamentally, investors have every reason to be bullish pounds," says Lien. 

Next week is a very important one for the U.K. with all 3 PMI reports scheduled for release along with a Bank of England Monetary policy announcement. For the first time ever, the Bank of England will simultaneously release its policy decision, the meeting minutes, the votes and new macroeconomic forecasts.