Fed Hike, GDP and Consumer Confidence

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The Dollar and U.S. economy are the focus for foreign exchange traders in the final week of July with the all-important Federal Reserve rate hike falling midweek, but it is arguably Thursday’s GDP release that holds greater relevance for investors.

Below are the key events in the coming days that are bound to have some influence on the forex market.

Conference Board Consumer Confidence Index (Tuesday, 15:00 BST).

The Consumer Confidence Index further decreased in June to 98.7, following a decline to 103.2 in May.

Until the next index release on July 26, the recent decline is the lowest it has been since February 2021, when the US economy was recovering from the effects of the pandemic.

Analysts presume that consumers’ grim outlook on the future of the economy is caused by the increasing fears about inflation and the current hike in the price of food items and gas.

The continuous increase of interest rates in an attempt to manage inflation has also cooled down consumer spending.

Consumer Confidence Index reveals the degree of satisfaction or pessimism consumers have regarding the state of the economy.

Optimism about the state of the economy can increase the country’s GDP as consumers will spend more money which is crucial for the economic health of any country.

On the other hand, a decline in consumer confidence can slow down economic activities because consumers will be more concerned about protecting their wallets.

The CCI provided by the Conference Board provides vital information both to central banks and
forex traders.

It is relatively accurate, and its release can affect investors’ confidence in the strength of an economy which in turn affects trading activities.

Despite its importance as an element of fundamental analysis, the CCI should be used as a lagging indicator because it only shows you what has happened.

In addition, it is subjective and surveys a small group of people every month to include in its report.

It should be used with other indicators to give a better idea of where the country’s economy is going and the subsequent value of its currency.

Above: The Dollar index at daily intervals, with parabolic pattern indicators overlaid.

Federal Interest Rate Decision (Wednesday, 19:00 BST).

The Dollar performed strongly in the first half of the year. But with the subject of inflation moving from mere discussions to concrete doubts, there is fear about the country’s ability to take on the rise unexpected price climb.

The Central Bank of the United States started March with a 25 bp (basis point) interest hike and increased it 50bp after the Board of Governors of the Federal Reserve (Board), and the FOMC met in May.

The interest rate got a drastic increase of 75 bp at the July meeting.

This is the most aggressive increase that has been made by the Central Bank in decades.

The higher the interest rate, the more profit traders can make from it, making it an important
factor in the forex market.

The interest rates of different currencies all have some form of impact on the Forex market and can move it in either a bullish or bearish direction depending on the decisions that were made.

However, because of the standing of the US economy, the interest rate decisions made in the monthly meetings of the Central Bank have the most influence on trading activities.

The recent increase in its interest rate gives the Dollar bullish momentum due to the simultaneous rise in value. Traders can take advantage of the high returns the increase
promises, and the next meeting on July 27 will provide further clarity regarding the stability of the Dollar.

Due to the 1.75% rise in the interest rate in June, the market is undecided as to whether the rates will increase by 2.5% during the next meeting.

Also, the fear of recession still exists, and this has worked in favour of the Dollar as investors flock to the high-yielding safe haven.

This has also helped the Dollar to strengthen against other currencies like Euro.

But there is still the possibility that the rate hikes in an attempt to manage the price pressure will hurt the economy. This is why traders will be paying attention to this event in case the impending change leads to the occurrence of parabolic patterns in the currency.

United States GDP Growth Rate QoQ Report (Thursday, 15:00 BST)

In the first quarter of 2022, the country’s GDP experienced an unexpected decline of 1.4% against the expected 1%.

This decline was largely caused by the decline in private inventory investment, the surging inflation, and the pullback in defense spending. Plus, the decrease in exports during the first quarter resulting in a trade deficit, had a negative effect on the growth.

GDP is a key indicator of the health of a country, and as such, it has a significant effect on financial markets, including the Forex market. When the GDP report is released, the volatility of the currency rises or falls depending on how off the mark the report is from expectations.

It can also affect other areas of an economy, such as interest rates.

When a country has a lower GDP figure compared to what was expected, it increases doubts about the value of the currency, and traders are more likely to sell off.

When the GDP report comes out as expected, this requires a bit more attention from forex traders.

Price action will be mixed as the market tries to understand the implication of the report, and it is advisable to get a better perspective of the currency’s economy by checking prior data.

The GDP decline did not prevent the Central bank from hiking up interest rates, with experts believing that the fall in GDP was merely noise and not an indication of recession.

However, if the Q2 GDP report that will come out on July 28 reveals another decline, it could indicate a potential recession.

If this happens, it can threaten the stability of the Dollar, thereby affecting trading activities as well.

But with the report soon to be released, experts predict that the growth for Q2 will increase and come up to 0.9%, thereby quelling concerns about an impending recession.