USD: GDP and Powell can add fuel to dollar rally - ING

This week's strong USD performance has been driven by a combination of the US-EU deal, positioning adjustments, and month-end flows. These factors should start to fade now, shifting all the attention to data and the Fed. Before diving into the US calendar, it's worth noting that the positioning squeeze means the dollar is in a less oversold position and therefore faces more balanced risks, ING's FX analyst Francesco Pesole notes.

Conditions for a dovish shift are in place

"Yesterday's US data was mixed. On the positive side, the US goods trade deficit narrowed sharply to $86.0bn in June from $96.4bn in May, driven by a 4.2% MoM drop in imports, while exports declined only 0.6%. Conference Board consumer confidence was also stronger than expected, although the current conditions index deteriorated, led by job market concerns. That was confirmed by soft JOLTS numbers."

"Today, expect the ADP jobs figures to attract some interest despite their poor predictive ability for official payrolls, but the biggest release is the advanced 2Q GDP report. The narrower June trade deficit reported yesterday underpins our economists' call for a 3.3% annualized growth, above the 2.5% consensus. Expect personal consumption figures to be in focus after the very soft 0.5% 1Q print. The latest consumer confidence figures are consistent with real consumer spending around 1-1.5%. The core PCE is the other major component to watch: it's expected at 2.3% QoQ."

"Following these releases, the Fed will take canter stage. A hold is the consensus call and markets are pricing near-zero probability of a cut. We doubt the conditions for a dovish shift are in place, and we suspect market pricing for September (-16bp) may be challenged by a broadly unchanged stance by the FOMC. Chair Powell is likely to face questions regarding his position amid increased political pressure from President Trump to cut rates or step down. To date, Powell has provided no indication of a policy shift, and we expect a reaffirmation of the Fed's independence alongside his commitment to remain in office. This, combined with a stronger-than-expected GDP print, can add fuel to the dollar's good momentum."