Investing.com - The U.S. dollar plunged against a basket of major currencies on Friday, after data showed that the U.S. economy grew at a slower pace than expected in the second quarter, while the yen soared after the Bank of Japan disappointed market expectations for stimulus.
The advance read on second quarter U.S. GDP showed a 1.2% annualized growth rate, well below expectations for 2.6%, the Commerce Department said on Friday. First quarter GDP was revised lower to 0.8% from 1.1%.
The disappointing data lessened the threat of an early interest rate rise from the Federal Reserve. Fed funds futures priced in just a 12% chance of a rate hike by September by late Friday. December odds were at 33%, down from 43% a day earlier and compared to 53% at the start of the week.
The U.S. dollar index, which measures the greenback’s strength against a trade-weighted basket of six major currencies, plunged to a five-week low of 95.34 in wake of the disappointing GDP report.
It was at 95.53 by late Friday, down 1.2% for the day and 2.1% lower on the week, amid fading expectations of a Fed rate hike in the next couple of months.
The Fed left interest rates unchanged on Wednesday and said near-term risks to the U.S. economic outlook had diminished. However, the central bank stopped short of signaling that a further increase in U.S. interest rates is on the cards for later this year.
Meanwhile, the yen rallied after the Bank of Japan approved only moderate stimulus measures at Friday's monetary policy meeting, disappointing markets which were hoping for much more aggressive easing.
While the BoJ eased its monetary policy further by increasing its purchases of exchange-traded funds, it opted not to cut interest rates deeper into negative territory or increase the monetary base, as analysts had widely expected.
The dollar tumbled to an intraday low of 101.97 against the yen, a level not seen since July 11, before recovering to 102.03 by late Friday, down more than 3% for the day and 3.8% lower for the week (USD/JPY).
The BoJ said it will conduct a thorough assessment of the effects of negative interest rates and its massive asset-buying program in September, suggesting that a major overhaul of its stimulus program may be forthcoming and reviving expectations it could adopt some form of "helicopter money".
Meanwhile, the euro climbed to a five-week peak of 1.1197 against the dollar on Friday, before ending at 1.1175, up 0.88% for the day and 1.8% higher for the week (EUR/USD).
Data released Friday showed that euro zone gross domestic product rose 0.3% in the second quarter, slowing from growth of 0.6% in the preceding quarter, while unemployment remained unchanged at 10.1% in June. Inflation in July also increased slightly, coming in at 0.2%, according to Eurostat.
Elsewhere, the British pound inched up modestly, with GBP/USD up 0.5% at 1.3229 late Friday. Gains were capped as investors are wagering on a rate cut and additional stimulus from the Bank of England next week August.
In the week ahead, investors will continue to focus on U.S. economic reports to gauge if the world's largest economy is strong enough to withstand a hike in interest rates in the coming months, with Friday’s nonfarm payrolls data in the spotlight. There is also U.S. ISM data on both manufacturing and service sector activity.
Thursday’s rate announcement from the Bank of England will be in focus, amid mountings expectations the central bank will step up monetary stimulus to counteract the negative economic shock from the Brexit vote.
Elsewhere, in China, market players will be looking out for data on the country's manufacturing sector, amid ongoing concerns over the health of the world's second biggest economy.
Ahead of the coming week, Investing.com has compiled a list of significant events likely to affect the markets.
Monday, August 1
China is to publish its official manufacturing and non-manufacturing PMIs and the Caixin manufacturing index.
The U.K. is to release data on manufacturing activity.
Later in the day, the U.S. Institute of Supply Management is to release data on manufacturing activity.
Tuesday, August 2
New Zealand will release a report on quarterly inflation expectations.
The Reserve Bank of Australia will publish its interest rate decision.
The U.K. is to release data on construction activity.
The U.S. is to report on personal income and spending.
Wednesday, August 3
China is to publish the Caixin service sector index.
The U.K. is to release data on service sector activity.
The U.S. is to release the monthly ADP nonfarm payrolls report, while the ISM will publish its non-manufacturing index.
Thursday, August 4
Australia will release data on monthly retail sales.
The BoE is to announce its monetary policy decision and publish the minutes of its policy meeting. The central bank will also produce its quarterly inflation report. BoE Governor Mark Carney will address the financial press afterwards.
The U.S. is to release data on initial jobless claims as well as factory orders.
Friday, August 5
The Reserve Bank of Australia will publish its monetary policy statement, which provides valuable insight into the bank's view of economic conditions and inflation.
Canada will release its monthly employment report as well as data on the trade balance.
The U.S. is to round up the week with the closely watched nonfarm payrolls report.