USD Edges Higher Ahead of GDP

At 8:30 AM US Q2 GDP y/y (exp 3.2%, prev 0.7%)
US Q2 PCE y/y (exp 3.6%, prev 3.5%)
US Q2 core PCE (exp 2.0%, prev 2.4%)
At 10:00 AM US July University of Michigan Sentiment Survey (exp 91.2, prev 85.3)

The greenback remains buoyed in early Friday trading, holding onto its previous session’s gains against the euro and sterling. The yen also continues to trade near its highs against the majors following the steep sell-off in the global equity bourses from the previous session, as heightened risk aversion remains a prime catalyst in carry trade unwinding. Lingering fears of a credit crunch and its detrimental impact on global financial markets have prompted investors to dump equities in favor of US Treasuries.

The economic calendar is poised to provide further support for the greenback, with markets looking ahead to second quarter GDP and the July University of Michigan sentiment survey. US growth in Q2 is forecasted to post a robust 3.2% gain, up sharply from a paltry first quarter reading of 0.7%. An upbeat GDP figure bodes well for the dollar and reinforces the case for the FOMC to remain unchanged over the remainder of this year, instead focusing on inflationary pressure. Accordingly, the Fed’s preferred inflation-measure, the PCE, is seen edging up in Q2 to 3.6% from a year earlier at 3.5%. The core PCE reading, however, is estimated to slip to 2.0%, down from 2.4%. Meanwhile, consumer sentiment is seen firming in July as the University of Michigan sentiment survey is forecasted to creep higher to 91.2 versus 85.3 from a month earlier. Overall, we expect the greenback to maintain its upbeat tone throughout the session, supported by data revealing improving US fundamentals.