US GDP Declines for Third Consecutive Quarter

Economic events are edging painfully close and, so far, the US Dollar remains lower than the market open. The stock market, on the other hand, is trading higher in the pre-market session. Based on this price movement, investors may assume that the Federal Reserve Chairman will indicate a 50 basis point hike, and generally take a more dovish stance than normal. Considering the lower level of inflation and poor economic figures over the past 4 days, it would not be a major surprise to the market.

However, many economists believe the Fed will stick to their strong hawkish stance as inflation remains high and oil prices are rising again. Therefore, the lack of Dollar strength and bullish stock movement may be misleading. The positive stock movement may have been a result of China’s new fiscal policy worth $146 billion, as well as plans for the US to partially forgive some student debt. To be certain, we will have to wait and see for Mr. Powell’s speech tomorrow. Most economists believe that tomorrow’s symposium will be more important than today’s.

One of the latest announcements has come from the President of the Federal Reserve Bank of Atlanta, Raphael Bostic. He advised that the Fed’s interest rate hikes will strongly depend on upcoming data. In other words, if inflation does not continue to decline the Fed will most likely stick to a 75 basis point hike. He also added that it is “too soon” to determine if inflation levels have peeked in the US.

So far, the main economic release of the day has been the Gross Domestic Product (GDP) for the US. This is deemed to be a significant release for traders and economists as the figure not only affects the demand for US assets, but also determines the economic condition of the country. General consensus seems to be that if the GDP figure declines for 2 consecutive quarters, the economy is in a recession.

The US GDP has been confirmed as -0.6% which is slightly better than the expected figure of -0.7%. This indicates that the US economy has contracted for a third consecutive quarter. Previously, most US economists refused to accept the US is in a recession. However, as the economy continues to decline, many question whether their opinion will change. So far, the US Dollar has slightly increased since the release.

XAG/USD

Many investors are uncertain whether they should be trading gold or silver. It should be noted that both are strongly correlated and therefore the price movement and trends are very similar. However, silver is more volatile and therefore traders must consider their risk profile, strategy, and position size while trading.

The price movement of the instrument remains within a retracement which formed during Monday’s Asian session. It has managed to maintain an Elliott Wave pattern forming higher highs and higher lows, however, the volatility and momentum are minimal so far. Whether the price will gain momentum to form a trend or collapse again will depend on the US Dollar and market confidence.

Other safe-haven assets such as bonds have performed exceptionally well this week. This could prompt traders to turn to the bond market, rather than gold and silver, in an effort to mitigate risk.

According to the latest report from the US Commodity Futures Trading Commission (CFTC), speculative positions on XAG/USD increased from 2,900 to 3,500. The increase could be related to investors positioning themselves ahead of the symposium. There were also minor changes in the balance between sellers and buyers. "Bears" hold the lead in speculative contracts but the position of the "bulls" is only slightly inferior, amounting to 32 million against 37 million from sellers. This week, long positions have been reduced by 647,000 contracts, while short positions have decreased by 1.1 million contracts. This indicates that many short sellers have chosen to cash out.

EUR/USD

The price movement of the EUR/USD pair is interesting as we see a quick surge of buyers push the price significantly higher, but then it simply loses momentum and declines back to the previous support level. The price is also in a difficult technical scenario because traders are not necessarily confident in buying the Euro but at the same time, they are uncomfortable speculating that price will continue to decline. Why? Simply because the price is at a long-term low. Traders are therefore hoping for a strong price driver this afternoon or tomorrow.

A little while ago, Esther George from the Fed spoke to journalists just outside the symposium. The president of the Kansas City Fed, seemed more hawkish than anything else. She noted that the employment levels in the country are significantly higher than “normal”. This may have been caused by the higher inflation pushing more citizens into work.

In addition to this, she refused to confirm that the Central Bank would not increase its Fund Rate up to 4-5%. According to Ms. George, the Fed will continue the hikes until demand drops to a level similar to supply. The question remains as to whether inflation will decline at a speed which satisfies the Fed.

The Euro, on the other hand, has been slightly supported by positive data on Germany's GDP figures for the second quarter. The figures turned out to be better than expected. The German economy grew by 0.1%, which is better than the 0% expected.

Key takeaways:

• The US Dollar remains lower than the market open, while the US stock market is trading higher in the pre-market.
• The US GDP has been confirmed as -0.6%, which is slightly better than the expected figure of -0.7%.
• Speculative positions on XAG/USD have increased according to CFTC.
• EUR/USD can’t seem to maintain bullish momentum.
• Germany's GDP second quarter figures were better than expected. The German economy grew by 0.1%
• Investors have their eyes on Powell and Jackson Hole - looking for indications whether the next rate hike will be 75 or 50 basis points.