The Dollar Looks To Be Entering A 'New Phase Of Weakness" After The Weak GDP Number

U.S. GDP grew 1.2 percent in the second quarter of 2016, an improvement from the first quarter's 1.1 percent gain but still well below the 2.6 percent economist expectation. 

"2Q U.S. GDP was certainly disappointing, but strong consumer spending still gives reason for cautious optimism," said Drivewealth Head Market Strategist Brian Dolan in an email. "Continued declines in business spending and investment seem most likely to continue in light of the political uncertainty accompanying the U.S. election season."

Dolan added that, while the number will likely be revised higher in the coming months, it "reinforces the Fed's cautious stance and increasingly makes a September rate hike highly unlikely. On top of the softer U.S. outlook, and with the BOJ's disappointing inaction, the USD looks to be entering a new phase of weakness.

"I'm now looking for the EUR to return to the upper end of recent ranges in the 1.15-1.16 area, and for the USD/JPY to fall back toward 99-100.00 in coming weeks. A weaker U.S. dollar and lower rate outlook should be risk asset supportive overall, but [the] markets look set to continue to struggle to extend recent highs," Dolan said.

Here's a graphical representation of that. From Dolan:

"The chart below focuses on the US dollar index, which is heavily weighted to the EUR and also includes the JPY. The USD has clearly broken down out of the most recent up-channel (red lines) and has tested the horizontal support from the lows in early July (thick yellow line) and the 50% retracement level of the post-Brexit rally. It's holding above the daily Kijun line (thin yellow line), a break below which would suggest a test of the cloud (blue area) at the minimum, and more likely a move to close the Brexit-gap (oval)."