Thu, May 26, 2022 @ 16:36 GMT
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Dollar Retreats Despite US Economy Performing Better than Expected; Pound Reverses Losses after Barnier’s Speech

During European trading, markets pushed the dollar lower as concerns grew over Trump’s tax proposals following an initial positive response. The dollar’s weakness gave a breather to other majors, with the euro and the pound being the best performers, while the latter gained additional support following encouraging comments made by the EU Brexit negotiator Michel Barnier.

The dollar reversed gains made earlier against a basket of major currencies despite better than expected final GDP growth figures as investors were assessing that Trump’s tax cuts proposed yesterday might fail to pass in Congress as they could potentially raise nation’s debt levels.

The final US GDP growth rate for the second quarter came in unexpectedly at 3.1% q/q, above the 3.0% expected and the 1.2% seen in the first quarter. August goods trade balance was also a surprise as the deficit declined to $62.94bn while projections were for the deficit to reduce to $65.00bn from $65.10bn.

On the other hand, initial jobless claims during the past week increased by 272,000 versus 260,000 observed two weeks ago and 270,000 anticipated, driving the 4-week average measure to a 16-month high of 277,750.

The dollar index sank to 93.15 after touching a five-week high of 93.47 in the Asian session. Dollar/yen was 0.27% down on the day at 112.51.

In Brussels, the EU Brexit negotiator Michel Barnier and his UK counterpart David Davis held a press conference while in the UK the BOE Governor Mark Carney and the UK Prime Minister, Theresa May, spoke at the 20th independent anniversary of the Bank of England.

Remarks from Barnier provided some support to the pound after he commented that Brexit negotiations, which moved on to the fourth round on Monday, were "useful" and "dynamic" but not sufficient enough for talks to move to trade topics. In addition, he added that it might take "weeks or months" before trade issues come to the table as both sides continue to have different opinions on the Brexit bill and on the role of the European Court of Justice after the divorce.

The BOE’s Carney, commenting on Brexit, said that monetary stimulus would be unable to mitigate any negative effects – mainly weaker real incomes – arising from the country’s exit from the EU. He added that the only thing the central bank could do is smooth the economic cycle. A few minutes later, PM May gave her own speech but did not address Carney’s earlier comments. Instead, she made talk of favoring free markets as the best way to run an economy, saying that "a free market economy is the only sustainable means of increasing living standards of everyone in the country".

The pound gained 0.37% on the day, climbing to $1.3429 ahead of the second quarter’s GDP growth readings tomorrow.

The Business and Consumer survey from the European Commission showed that economic sentiment in the Eurozone in September rose more than expected, with the index rising to a 10-year high of 113.0 compared to the forecasted 112.0. Moreover, consumers’ confidence in economic activity improved as well, increasing by 0.3 percentage points from -1.5% to -1.2%, while they were also more certain that prices will grow over the next 12 months. Though, tomorrow’s CPI readings out of the eurozone will give more clues on the region’s inflation path.

Euro/dollar recovered from yesterday’s losses, jumping by 0.44% to 1.1792.

Regarding commodities, oil prices touched new highs while gold edged up to $1,283.10 per ounce. Specifically, WTI crude surged by 0.52% to $52.41 per barrel and Brent rose by almost 1% to $58.46 after Turkey threatened on Thursday to impose restrictions on oil trading with Iraq’s Kurdistani region.

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