Investors reassess Fed’s rate outlook as focus shifts to key US data

The dollar rally that was fueled by the hot inflation data on Wednesday extended further on Thursday and the US Dollar Index reached its strongest level in nearly two decades at 109.29. Dovish Fed commentary, however, caused the greenback to lose interest ahead of the key Retail Sales data from the US. Additionally, the Fed will release its Index of Common Inflation Expectations (CIE) for the second quarter and the University of Michigan will publish the Consumer Sentiment Survey for July. Meanwhile, the European economic docket will feature the May Trade Balance data.

Federal Reserve Governor Christopher Waller argued on Thursday that markets may have gotten ahead of themselves by pricing a 100 basis points (bps) rate hike in July. Waller also added that he is in favour of a 75 bps hike in July but noted that he could lean toward a bigger rate increase if retail sales and housing data come in stronger than expected. According to the CME Group FedWatch Tool, markets are now pricing a 50% probability of a 100 bps rate hike in July, compared to 80% during the European session on Thursday.

Earlier in the day, the data from China showed that the Gross Domestic Product (GDP) contracted by 2.6% on a quarterly basis in the second quarter. This reading came in worse than analysts’ estimate for a contraction of 1.5%. On a positive note, Retail Sales in China expanded by 3.7% on a yearly basis in June. Markets remain cautious in the European morning with US stock index futures losing between 0.25% and 0.3% on a daily basis.

EUR/USD plunged to its lowest level in nearly twenty years at 0.9952 on Thursday but managed to recover above parity.

GBP/USD fluctuates in a relatively tight range above 1.1800 on Friday following Thursday’s selloff. On a weekly basis, the pair is down nearly 200 pips.

USD/JPY jumped to fresh multi-decade highs above 139.00 on Thursday but lost its bullish momentum. The benchmark 10-year US Treasury bond yield is down more than 1% on a daily basis, not allowing the pair to gain traction.

Gold fell below $1,700 for the first time in nearly a year on Thursday. Although XAUUSD rose above that level on falling yields, it is having a difficult time finding demand early Friday.

Bitcoin closed the second straight day in positive territory on Thursday and started to push higher toward $21,000 early Friday. Ethereum is up nearly 2% in the early European session, trading above $1,200.

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