How will preliminary GDP report influence USD?
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- The Q2 GDP is the first top-tier US economic report released after the FOMC meeting.
- With the Fed likely indicating it will remain “data-dependent,” growth and inflation numbers from the GDP report could be critical.
- US Dollar Index could receive additional support from positive data.
The US Bureau of Economic Analysis (BEA) is scheduled to release its first estimate of the second-quarter Gross Domestic Product (GDP) on Thursday, July 27th at 12:30 GMT. According to market forecasts, the US economy is expected to expand at an annualized rate of 1.8% in Q2, following the 2% growth rate recorded in the first quarter.
This release will be the first major economic report following the Federal Reserve meeting, and the central bank is expected to continue its ‘data-dependent’ approach to monetary policy. As a result, the Q2 GDP figures will be closely watched by investors and analysts. It’s worth noting that the first release of Q2 GDP typically has a greater potential to influence the markets than subsequent revisions.
US GDP: What else to look for in the Q2 preliminary report
In addition to the overall growth rate of close to 2.0% in the second quarter, the BEA report will include other figures that will be observed carefully. One of these figures is the Core Personal Consumption Expenditures (PCE) Index, a key inflation measure used by the Federal Reserve. According to market consensus, the Core PCE Index is expected to decline to 4% in Q2 from 4.9% in Q1, which would be the lowest level since the first quarter of 2021. Another inflation indicator that will be scrutinized is the GDP Price Deflator, also known as the GDP Product Price Index. This is expected to decline to 3% in Q2 from 4.1% in Q1, marking its lowest level since the fourth quarter of 2020.
At the same time (12:30 GMT), the US Durable Goods Orders and the weekly Jobless Claims reports are also due to be released. A few minutes later, European Central Bank (ECB) President Christine Lagarde is scheduled to deliver her post-meeting press conference. With the markets still digesting the outcome of the FOMC meeting held on Wednesday, volatility is likely to prevail.
How could the GDP release affect the US Dollar
The International Monetary Fund (IMF) has raised its US GDP growth estimate for 2023 from 1.6% in April to 1.8%, and its global growth estimate from 2.8% to 3.0%. However, the IMF has warned that global growth risks remain tilted to the downside. US growth expectations are higher than most European countries, struggling to avoid a recession. The growth divergence between the US and Europe could limit the decline of the US Dollar or the rally of EUR/USD. If the difference narrows, the situation could change.
If the Q2 GDP report shows higher-than-expected growth figures combined with hotter inflation numbers, the US Dollar could be poised for a significant rally against other currencies. Such a scenario would make markets consider it more likely that the Federal Reserve will raise interest rates again, and it would also demonstrate that the US economy remains strong and resilient despite monetary policy tightening.
A number in line with expectations, with an annualized growth rate of around 2%, and decreases in inflation indicators – such as the Core PCE Index from 4.9% to 4% or the GDP Price Deflator from 4.1% to 3%– have the potential to weigh on the US Dollar by pushing down US Treasury yields. Such figures would support the scenario of no further rate hikes from the Fed.
The worst scenario for the US economy – higher inflation and lower growth – is not necessarily the worst scenario for the US Dollar. The most negative potential outcome for the Greenback would be a negative surprise in growth numbers and inflation slowing down more than expected. Fears of a recession, combined with inflation falling toward the target too quickly, would likely trigger expectations of rate cuts, probably in the fourth quarter or the first quarter of next year.
GDP FAQs
A country’s Gross Domestic Product (GDP) measures the rate of growth of its economy over a given period of time, usually a quarter. The most reliable figures are those that compare GDP to the previous quarter e.g Q2 of 2023 vs Q1 of 2023, or to the same period in the previous year, e.g Q2 of 2023 vs Q2 of 2022.
Annualized quarterly GDP figures extrapolate the growth rate of the quarter as if it were constant for the rest of the year. These can be misleading, however, if temporary shocks impact growth in one quarter but are unlikely to last all year – such as happened in the first quarter of 2020 at the outbreak of the covid pandemic, when growth plummeted.
A higher GDP result is generally positive for a nation’s currency as it reflects a growing economy, which is more likely to produce goods and services that can be exported, as well as attracting higher foreign investment. By the same token, when GDP falls it is usually negative for the currency.
When an economy grows people tend to spend more, which leads to inflation. The country’s central bank then has to put up interest rates to combat the inflation with the side effect of attracting more capital inflows from global investors, thus helping the local currency appreciate.
When an economy grows and GDP is rising, people tend to spend more which leads to inflation. The country’s central bank then has to put up interest rates to combat the inflation. Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold versus placing the money in a cash deposit account. Therefore, a higher GDP growth rate is usually a bearish factor for Gold price.
US Dollar Index levels to consider
The US Dollar Index (DXY) began a recovery last week from one-year lows below 100.00 and climbed to 101.65, where the 20-day Simple Moving Average (SMA) capped the upside. The main bias remains bearish, but if the DXY manages to stay above 101.00, it could test the crucial SMA again, and a break higher could open the doors to a more sustained rally.
On the other hand, if the DXY drops below 101.00, renewed bearish pressures could push it towards 100.00 and then the year-to-date low at 99.56. A break below these levels would signal a resumption of the bearish trend that has been in place since November of last year.
US Dollar FAQs
The US Dollar (USD) is the official currency of the United States of America, and the ‘de facto’ currency of a significant number of other countries where it is found in circulation alongside local notes. It is the most heavily traded currency in the world, accounting for over 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to data from 2022.
Following the second world war, the USD took over from the British Pound as the world’s reserve currency. For most of its history, the US Dollar was backed by Gold, until the Bretton Woods Agreement in 1971 when the Gold Standard went away.
The most important single factor impacting on the value of the US Dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and foster full employment. Its primary tool to achieve these two goals is by adjusting interest rates.
When prices are rising too quickly and inflation is above the Fed’s 2% target, the Fed will raise rates, which helps the USD value. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates, which weighs on the Greenback.
In extreme situations, the Federal Reserve can also print more Dollars and enact quantitative easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system.
It is a non-standard policy measure used when credit has dried up because banks will not lend to each other (out of the fear of counterparty default). It is a last resort when simply lowering interest rates is unlikely to achieve the necessary result. It was the Fed’s weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy US government bonds predominantly from financial institutions. QE usually leads to a weaker US Dollar.
Quantitative tightening (QT) is the reverse process whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing in new purchases. It is usually positive for the US Dollar.