US dollar index (DXY) collapse gains steam after the sharp US contraction

on Jul 30, 2020
  • The US dollar index (DXY) erased earlier gains as traders reacted to the weak Q2 GDP data.
  • The data showed that the economy contracted by a record 32.9%, while Germany contracted by just 10%.
  • Another data showed that the number of Americans signing for jobless claims rose for the second week in a row.

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The US dollar index (DXY) pared earlier gains as traders reflected on the Fed interest rate decision and the weak economic numbers from the US. The index, which measures the dollar’s strength against a basket of currencies, is trading at $93.35, which is the lowest level since June 2018.

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US dollar index

US economy contracted by a record in Q2

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The US economy contracted by a record 32.9% in the second quarter as the country remained in lockdown for most of the quarter. That was the worst contraction the economy has gone through since the great depression. Still, the data was better than the 34.1% decline that analysts polled by Reuters were expecting.

According to the Bureau of Economic Analysis (BEA), the decline was widespread across the various sectors of the economy. The current personal income increased to $1.39 trillion in the quarter, mostly because of the payments made by the government. Personal outlays fell by $1.57 trillion in the quarter after falling by $232 billion in the first quarter. Meanwhile, total personal savings rose to $4.69 trillion.

In total, the American economy contracted by $2.15 trillion in the quarter to $19.41 trillion. The PCE index fell by 1.9% after rising by 1.3% in the first quarter.

The data means that the American economy was among the worst-performing in the quarter. For example, data released this month showed that the Chinese economy expanded by 5.3% in the quarter. In Europe, numbers released by Destatis showed that the German economy contracted by 11.7% in the quarter.

Is a V-shaped recovery possible?

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The US GDP data came at a difficult time for the US economy as the number of coronavirus cases continue to jump. The number of infections in the country has jumped to more than 4.5 million while total deaths have risen to more than 151k.

The impacts of this situation are visible. For example, data from the Bureau of Labour Statistics showed that more than 1.4 million Americans filed for unemployment benefits in the previous week. That number was higher than the 1.42 million that was reported last week. It also shows that the employment situation is getting worse.

The data came a day after Jerome Powell warned that the US economy faced an uneven recovery because of the virus. In the statement, the bank left interest rates unchanged between 0% and 0.25%. It also left the open-ended quantitative easing policy unchanged.

The US dollar has gained against most currencies in the index. It has gained by 0.50% against the Canadian dollar, 0.45% against the Swedish krona, and 0.25% against the yen. It has barely moved against the euro but it has fallen by 0.30% against the British pound.

US dollar index technical forecast

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US dollar index
US dollar index technical forecast

The daily chart shows that while the US dollar index has gained today, it is in an overall bearish trend. It is below the 50-day and 100-day exponential moving averages. The RSI has moved to the lowest level since March 20. Also, the price is below the descending trend line that is shown in purple. Therefore, the price is likely to continue falling as bears target the next resistance level at $93. Consider the statement below from analysts at ING.

“The dollar may be looking at some stabilisation as risk assets stay capped for now, but with the other two safe havens (JPY and CHF) looking more attractive for a defensive stance as virus cases keep surging, USD recovery prospects still look tenuous.”

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