U.S. Economy Surges, Dollar Gains Momentum: Implications for Investors

Upbeat surprises in US data released yesterday have bolstered the dollar’s position and led to rebound in Treasury yields with expectations regarding the Federal Reserve's policy shifting towards another rate hike. The U.S. GDP growth for the second quarter (preliminary estimate) reached 2.4%, well above the forecast of 1.8%, indicating a substantial boost in the activity of the US economy for the second quarter, which was likely unexpected by many. Also surprising were the orders for durable goods in the U.S. – a consumption component that has a significant positive correlation with household income expectations – in June, orders increased by 4.7% compared to the previous month, against a forecast of 1%:The market's sensitive reaction to the data is due to the Federal Reserve's statement during its last meeting, mentioning the possibility of a rate hike in September, contingent on the strength of incoming data. Federal Reserve Chairman Powell also cautioned against drawing far-reaching conclusions from the latest inflation report, which showed that core inflation slowed from 5.1% to 4.8%. According to the head of the Central Bank, signals of longer and sustained movements in inflation towards the target level are necessary for a change in policy course towards a dovish one. However, inflation remained in the range of 5.3-5.6% for almost the entire first half of the year, except for the last month:The yield on two-year bonds increased by 12 basis points after the data release, from 4.83% to 4.95%, but later lost some of the gains. Gold prices saw a sharp sell-off, dropping from 1979 to $1942.50 after the release but attempting to rise again on Friday. There was also some risk-off sentiment in the market for risk assets, and major U.S. indices closed moderately lower yesterday.Next week, the market's attention will be focused on NFP data, ISM activity indices in the service sector, and ADP data. The GDP and durable goods orders data have set the market's expectations for further positive surprises in the U.S. economy, which is why the dollar retains the potential for growth in the upcoming week. The lower boundary of the current ascending trend in EURUSD is an attractive target, approximately corresponding to the level of 1.085-1.09.