US GDP Contracts in Q2 2020 – What Will the USD Do in August?

Two important events shaped the previous trading week – the FOMC Meeting last Wednesday and the US GDP. The Gross Domestic Product (GDP) contracted by 9.5% QoQ, but the decline was not so bad when compared with other developed economies. For example, the Eurozone GDP fell by over 12%, with Spain being hit the hardest – a drop beyond 18%.

The US dollar traded with an offered tone for the entire month of July. The EURUSD, in particular, was extraordinarily strong, reaching levels above 1.19 on the last trading day of the month. However, profit-taking towards the end of the trading month made it retrace a hundred pips into the close.

But the USD traded offered not only against the Euro but against the GBP or AUD too. Overall, July was not the best month to bid for the USD, and the FOMC Meeting did not help the dollar bulls.

The downside risks to growth are still present for the US economy and the developed economies too. An asymmetric U-shape recovery is most likely to happen, rather than a V-shape one.

Moving ahead, August may prove decisive for the USD. With the US elections coming closer by the day and the NFP on Friday, the USD may have a strong comeback.

The bid for the USD is supported by the shrinking USD liquidity seen in the system. The Treasury’s account at the Fed is growing by the day, reaching almost $2,000 trillion – money that sits and piles up instead of being deployed in the economy.

Private consumption fell in the United States in the second quarter. At the same time, the personal savings rate increased exponentially, showing households’ reluctance to spend.

While some indicators show an improvement since mid-April, the US economy still needs bot the Fed and the Congress support. A new fiscal package worth another trillion dollars may be released to help people better handling the crisis.

All in all, the USD has an important week ahead. Besides the NFP on Friday, it is the week the ISM, ADP, and a new round of initial jobless claims will be released, helping investors form a better picture of the US economy.

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