The US economy is recording decent growth. The labour market report is also illustrating that it has been recording decent employment rises for more than a year. Inflation is the only stumbling block.



Relatively good US data merely confirms the market in its expectation of an imminent rate hike. That meant that the positive US GDP data did not require it to revaluate the situation. Disappointingly weak data on the other hand upsets this image.



According to Commerzbank, the market reaction to the ECI data was so much more pronounced because,

The market knows that low inflation is the Fed's main concern. Once it became clear that the weak growth results for Q1 were just a slip-up, concerns about the real economy wore off again quite quickly.

The market reacts asymmetrically to good and bad US data. That means that positive surprises cause less of a reaction than negative ones. The reasons behind that are that the majority of the market principally believes in a rate hike this year.

Even if the Fed did not send out a strong signal for a rate hike in September, its tone was clearly more optimistic at its latest meeting. After all it only wants to see "some further improvement" on the labour market rather than "further improvement". Weak data is likely to cause a more pronounced reaction of the USD exchange rates than unexpectedly good data. Only under these circumstances would the market feel inclined to revaluate the situation.



"In addition, the PCE deflator should be of greater interest than the ISM index, as the Fed pays particular attention to this inflation indicator. That means a notable appreciation of the USD should only be expected if today's PCE deflator convinces", added Commerzbank.