The macroeconomic data released in the U.S. on Wednesday was ambiguous yet informative. The second estimate of GDP for the second quarter confirmed a slowdown in economic growth, while the July core PCE index indicated sustained inflationary pressure. In other words, the economy is losing momentum, but inflation remains too high for a shift towards more accommodative monetary policy.
Starting with GDP, according to the BEA's second estimate, the U.S. economy grew by 1.5% year-on-year in the second quarter. This figure perfectly matched both the preliminary estimate and market forecasts. In the first quarter, growth was 2.1%, indicating that the U.S. economy is slowing.
However, the structure of the report looks somewhat stronger than the headline figure might suggest. The main drivers of growth were consumer spending, investment, and exports, while government spending had a negative impact. Importantly, the real final sales volume to private domestic purchasers increased by 3.9%, up from 1.7% in the first quarter. In other words, behind a relatively weak headline lies a fairly robust domestic demand.
For this reason, Wednesday's report cannot be labeled outright negative for the dollar. Yes, the overall growth rate is far from impressive, but the American consumer and private sector do not yet show signs of serious cooling. This is a crucial point in the context of the Federal Reserve's future monetary policy prospects, as a slowdown in GDP alone is not sufficient grounds for rate cuts if domestic demand continues to grow at high rates.
It is also worth noting that imports increased significantly in the second quarter, with a substantial portion of the growth attributed to capital goods—telecommunications equipment, semiconductors, and industrial machinery. Since imports are deducted from GDP, this factor mechanically worsens the final estimate (although it does not indicate a weakening of the domestic economy).
Furthermore, the inflation component of GDP does not give grounds for "dovish" conclusions. Specifically, the gross domestic purchases price index accelerated to 5.7% year-on-year in the second quarter (up from 3.6% the previous quarter). Quarterly PCE rose by 5.1%, and core PCE grew by 3.4%. The latter figure, however, slowed down from 4.4% but remains significantly above the Fed's 2% target.
In other words, the U.S. economy is indeed losing momentum, but it is more about a gradual slowdown rather than a sharp cooling. Consumers remain resilient, domestic demand is accelerating, and investments (especially in the technology sector and AI) continue to support economic activity. This combination allows the central bank to maintain a wait-and-see position.
The fundamental picture was also supplemented by the release of the core PCE index for July. The core personal consumption expenditures index, which excludes food and energy, increased by 0.2% month-on-month, up from 0.1% in June. Year-on-year, this figure remained at the previous month's level of 3.3%. Thus, there has been no further progress in slowing inflation. Meanwhile, the overall PCE also remained at the June level (3.7%), contrary to expectations of a slowdown to 3.6%. Month-on-month, this indicator rose by 0.2%, against a forecast of 0.1%.
All of this suggests that inflation did not accelerate in July, but there was also no further slowdown. Overall PCE remains significantly above the Fed's target, and the core figure exceeds it even more. At the same time, personal incomes increased by 0.4%, while disposable incomes rose by 0.5%. This indicates that the American consumer maintains financial stability.
As a result, a rather contradictory fundamental picture has formed for the greenback. The headline GDP figure suggests economic slowdown, but strong domestic demand limits the room for easing rhetoric from the Fed. The core PCE index, for its part, confirms the persistence of inflation, preventing traders from anticipating a quick rate cut.
In response to the publication, the EUR/USD pair fell by 40 pips but remained within the 16th figure. Such a weak reaction stems from contradictions in the current situation. The U.S. economy is indeed slowing down, but it is premature to speak of a sharp cooling. Inflation is not showing renewed acceleration but remains too high for monetary policy easing. The key question now is whether the July PCE will be a temporary halt in the disinflationary process or the first signal of its new acceleration.
If the market becomes convinced that economic activity will continue to decline and inflation will start to slow again, the arguments for a Fed rate cut will strengthen. However, if the July PCE turns out not to be a temporary halt but the first signal of renewed inflationary pressure, the room for monetary easing will narrow significantly. Both scenarios remain open, which explains the dollar's cautious reaction.
Most likely, the pair will remain range-bound within the price range of 1.1640–1.1700. Opening long positions seems reasonable only after confirming that buyers have kept the pair above the lower boundary of the range – the support level of 1.1640 (the lower Bollinger Bands line on the four-hour chart).
