US GDP Preview: Economic growth expected to moderate at year-end

• United States Gross Domestic Product is forecast to grow at an annualized rate of 2% in Q4.
• The resilience of the US economy could allow the Fed to delay the policy pivot. 
• Investors will also pay close attention to the Gross Domestic Price Deflator reading.

The Gross Domestic Product (GDP) report for the fourth quarter, to be released by the Bureau of Economic Analysis (BEA) on Thursday, is forecast to show an expansion of the US economy at an annualized rate of 2% following the impressive 4.9% growth recorded in the previous quarter.

After staying under persistent bearish pressure in the last quarter of 2023, the US Dollar (USD) managed to stage a rebound in January. The DXY USD Index is up nearly 2% since the beginning of the year, with markets reassessing the timing of the Federal Reserve (Fed) policy pivot.

US Gross Domestic Product forecast: What numbers could tell us

Thursday's US economic docket highlights the release of the preliminary GDP print for the fourth quarter, scheduled at 13:30 GMT. The first estimate is expected to show that the world's largest economy grew by 2% in the last three months of 2023, a relatively healthy pace despite being much lower than the third quarter’s 4.9% expansion. 

Inventory accumulation was the primary driver behind the GDP growth in the third quarter. As this component tends to move in the opposite direction from quarter to quarter, it will not be a major surprise to see a steep decline in the expansion rate toward the end of 2023.  

Market participants will also pay close attention to the GDP Price Deflator reading, also known as the GDP Price Index, which measures the changes in the prices of services and goods produced in the US. The GDP Price Deflator climbed to 3.3% in Q3 from 1.7% in Q2, suggesting that inflation had a bigger positive impact on growth than in the second quarter. 

Previewing the US GDP growth data, “In terms of economic output, we expect real GDP to have registered a below-trend 1.6% q/q AR expansion in 23Q4, much slower than Q3's blockbuster and unsustainable 4.9% increase,” TD Securities analysts said and continued:

“In the details, we look for consumer spending to have led the deceleration in activity (though likely growing at a still decent pace), while inventories are expected to be a major drag. We also forecast business investment to stay downbeat, as capex appears to have remained mostly impaired in Q4 (equipment investment has contracted in five out of the last six quarters). Even if our below-consensus projection is realized, output likely still rose at a very strong 2.4% pace in 2023 (2.7% Q4/Q4).” 

When is the GDP print released, and how can it affect the USD?

The US GDP report will be released at 13:30 GMT on Thursday. Ahead of the event, the US Dollar stays resilient against its rivals on growing expectations for a delay in the Federal Reserve’s upcoming rate cut. 

Before the Federal Reserve blackout period started on January 21, several policymakers pushed back against the market anticipation for a 25 basis points (bps) Fed rate cut in March. San Francisco Fed President Mary Daly said that she believes the central bank has a lot of work left to do on bringing inflation back down to the Fed's 2% target and argued that it’s too early to think “rate cuts are around the corner.” Similarly, Atlanta Fed President Raphael Bostic noted that his baseline scenario is for rate reductions to start sometime in the third quarter.

The CME FedWatch Tool’s probability of a 25 bps rate cut in March declined below 50% in the second half of January from nearly 80% in late December, reflecting the shift in market positioning.

A stronger-than-forecast GDP growth in Q4 could feed into expectations that the Fed is likely to refrain from lowering the policy rate in March and provide a boost to the USD with the immediate reaction. In case the GDP reading arrives near the market consensus of 2%, a GDP Price Deflator print at or above 3% could help the USD hold its ground, while a decrease toward 2% could hurt the currency. 

On the other hand, a disappointing growth figure below 1.5% could go against the “soft landing” narrative. In this scenario, markets could lean toward a Fed rate cut in March and trigger a decline in US Treasury bond yields, causing the USD to suffer losses against its major rivals. 

Eren Sengezer, European Session Lead Analyst at FXStreet, shares a brief technical outlook for the USD Index (DXY):

“The Relative Strength Index (RSI) indicator on the daily chart holds near 60, highlighting the near-term bullish bias. The 200-day Simple Moving Average (SMA) forms a pivot point at 103.50. In case DXY stabilizes above that level and starts using it as support, 104.40 (100-day SMA) and 105.00 (psychological level) could be set as the next bullish targets. On the flip side, the Fibonacci 38.2% retracement of the October-December downtrend forms strong support at 103.00 before 102.50 (20-day SMA) and 102.00 (Fibonacci 23.6% retracement).”