US Dollar is Worst Weekly Performer Thanks to GDP Figures: Latest Analyst Reactions

The US Dollar exchange rate complex has fallen notably following the release of the first estimate for second quarter 2016 GDP data.

The USD was the worst performing currency in G10 for the week ending 29th July.

The biggest losses were felt against the Japanese Yen and New Zealand Dollar while the Canadian Dollar and Pound Sterling both just managed to creep ahead.

The hammer-blow to the Greenback's performance came with the release of annualised US GDP figures for the second quarter of 2016 which showed growth that amounted to 1.20%, well below the 2.6% figure economists had forecast.

The surprisingly weak numbers prompted a predictable downside move in the US Dollar.

The US Dollar basked fell over a percent on the news and is seen at 95.77 at the time of writing.

The bulk of the damage is being done by the EUR/USD exchange rate which rose 0.78% to reach 1.1160 on the news.

What does the data imply for the Dollar, US Federal Reserve and economy going forward?

Here are the latest analyst reactions.

Hans Redeker at Morgan Stanley:

“The Fed has little to gain by hiking rates early. Hence, we regard the recent rise in real US yields that has supported the 4% USD rally seen since May as unsustainable.

“Our long-held framework suggesting a combination of high global debt, capacity overhangs and resulting low returns on investment should keep deflationary pressures intact.

“The impact that this environment will have on financial markets via a flattened yield curve and subdued inflation expectations should further support our weaker USD view, even though there have been recent upside surprises in US economic data.”

Michael Gapen at Barclays Research:

"Overall, and despite the disappointment at the headline level, we do not see much that is new in this report to change our interpretation of events in the second quarter.

"Household spending rebounded sharply in the quarter, suggesting that households remain confident about income and employment prospects. We are generally more willing to discount quarter-to-quarter deviations in inventories since the series is quite volatile and tends to reverse over time.

"That said, the remaining categories in fixed investment were soft and bear further watching. We retain our outlook for 2.0% growth in 2H 16, as household spending should be sufficient to keep the economy on an above-trend growth path while manufacturing, energy, and trade stabilize further."

Lloyds Bank Commercial Banking:

“Much of the downside surprise was due to a fall in inventories rather than weak final demand and as such is likely to be temporary. In light of that the Fed will concentrate more on other upcoming data including next week’s ISM surveys and the July payrolls report on Friday.  

“Nevertheless, it is still a significant negative surprise, which makes a near-term interest rate rise look unlikely.”

Johnny Bo Jakobsen at Nordea Markets:

"Q2 GDP growth came in well below expectations as companies reduced inventories and remained wary of investing, largely offsetting more robust consumer spending.

"The silver lining is that the end to the destocking cycle now seems closer and we expect growth to pick up in H2. While the weakness in Q2 GDP lowers expectations of a Fed rate hike already in September, a continued uptrend in wage pressures in Q2 supports the view that the Fed will resume normalising monetary policy later this year."

Alex Lydall, Senior Sales Trader at Foenix Partners:
 
Janet Yellen will continue to sit on the fence with interest rates for the foreseeable future on disappointing news this afternoon that US GDP increased to a sluggish 1.2%, on preliminary figures where analysts had expectations of an uplift to 2.6%.

“With global risk appetite tentative on the back of the EU Referendum results, the global powerhouse of the US is often seen as a precursor to global performance.

“If these preliminary figures signify a shift on the downside for the domestic economy in the US, not only will rate hikes be unlikely this year, but the benchmark for global risk will be adversely affected in the medium term.”