Dollar takes a break ahead of final US GDP, Powell’s testimony, end-of-quarter flows

The dollar is edging lower after rallying on Wednesday amid a taper-related increase in yields. Fed Chair Powell faces the cameras for the third consecutive day after reiterating his position that inflation should subside. Congress is still grappling with the debt ceiling after moving to avert a shutdown. US GDP and German inflation figures are eyed.

King Dollar: The greenback rallied on Wednesday, sending EUR/USD below 1.16, the lowest since November and GBP/USD toward 1.34. Elevated returns on Treasury yields – a belated reaction to the Federal Reserve’s taper signal last week – is the main dollar driver. Early on Thursday, the greenback is giving some ground.

Gold extended its decline, hitting a six-week low of $1,721 on Tuesday in a response to higher US yields. The rebound in XAU/USD has been more significant than in currencies.

Equities are on course for another day of gains on Thursday after stabilizing on Wednesday. The relative calm in stock markets comes despite several global worries, showing that dollar strength is linked to tapering.

Fed Chair Jerome Powell testifies on Thursday before a House Committee and will likely repeat his messages from recent days. In an appearance with central bank chiefs from the eurozone, the UK and Japan, Powell said he expects supply bottlenecks to ease. The Fed remains on course to announce a reduction in bond-buying in November.

US politics: US Senate Majority Leader Chuck Schumer said lawmakers agreed to extend government funding through December 3, averting an imminent shutdown. On the other hand, America is still on course to hit the debt ceiling in mid-October. President Joe Biden’s proposed $3.5 trillion expenditure plan is in the air amid infighting in his Democratic Party.

US second-quarter Gross Domestic Product is set to be confirmed at 6.6% annualized in the final read. The economic calendar is pointing to a moderate decline in weekly jobless claims.

Germany publishes its first inflation estimates for September after Spain surprised by reporting an annual level of 4%. Coalition talks in Europe’s largest economy have begun after the center-left SPD came on top in Sunday’s elections.

The UK continues struggling with shortages at petrol stations and also with the end of its furlough scheme. Fewer workers are supported by the government than earlier in the pandemic, but uncertainty about the impact on unemployment persist.

China continues grappling with power outages in the northeast, and authorities have moved to ration electricity and coal consumption. Concerns about additional supply-chain disruptions weighed on sentiment earlier this week. China’s official Manufacturing Purchasing Managers’ Index dropped below 50 in September, reflecting contraction.

On the other hand, service sector surveys remained upbeat. Bloomberg reported that Evergrande has resumed building in several projects, implying the indebted construction giant is still operating.

Cryptocurrencies: The better market mood seems to have pushed digital assets higher. Bitcoin is trading above $43,000, Ethereum tops $3,000, while Ada is holding above $2.10.

Flows: The turbulent third quarter draws to an end, implying last-minute adjustments from portfolio managers. Some of the most recent dollar gains could be reversed.

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