Q2 GDP Props USD

The dollar gained ground against the majors in the Thursday session, rising to its highest level in two years against the pound and edging toward the 1.47-level versus the euro. The greenback benefited from a combination of upbeat US economic data and weaker oil prices, with crude easing by almost $3 to $115.35 per barrel.

The reports released earlier today revealed stronger than expected growth in the second quarter, with preliminary GDP in Q2 at 3.3%, sharply higher than the previous reading of 1.9%. A closer breakdown of the report revealed a surge in exports, up 13.2% in Q2 with a larger decline in imports, down 7.6%. The growth figures bode well for the dollar, particularly in contrast with sluggish GDP results from the Eurozone, Japan and the UK.

In the Friday session, traders will look ahead to several key reports from the US, including PCE, personal consumption, personal income, Chicago PMI and the University of Michigan consumer sentiment survey. Chicago PMI in August is expected to slip to the key 50-level, down from 50.8 from July.

Sterling's Woes Continue

The British Pound continues to underperform across the board, slumping to fresh two-year lows against the dollar at 1.8247 and drifting closer to its all-time lows versus the euro. Recent reports from the UK point toward further deterioration in economic fundamentals, exacerbating recessionary fears and highlighting the current dilemma facing the Bank of England. Data released overnight showed a 10th consecutive monthly decline in home prices, which fell by more than expected, down 1.9% for August versus a 1.7% loss from a month earlier and down 10.5% for the year – its largest drop in 17-years. Meanwhile, the CBI retail sales index for August sank to its lowest level in 25-years at minus 46 from a minus 36 reading in the previous month.

The outlook for the UK economy remains bleak as a result of persistently high inflation impeding the Bank of England's ability to ease policy to stimulate the economy. We look for the weakness in the UK economy to continue to weigh on the sterling, with our near-term forecast around 1.80 for cable.

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