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.
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).”
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).”
The real Gross Domestic Product (GDP) Annualized, released quarterly by the US Bureau of Economic Analysis, measures the value of the final goods and services produced in the United States in a given period of time. Changes in GDP are the most popular indicator of the nation’s overall economic health. The data is expressed at an annualized rate, which means that the rate has been adjusted to reflect the amount GDP would have changed over a year’s time, had it continued to grow at that specific rate. Generally speaking, a high reading is seen as bullish for the US Dollar (USD), while a low reading is seen as bearish.Read more.
Next release: 01/25/2024 13:30:00 GMT
Source: US Bureau of Economic Analysis
The US Bureau of Economic Analysis (BEA) releases the Gross Domestic Product (GDP) growth on an annualized basis for each quarter. After publishing the first estimate, the BEA revises the data two more times, with the third release representing the final reading. Usually, the first estimate is the main market mover and a positive surprise is seen as a USD-positive development while a disappointing print is likely to weigh on the greenback. Market participants usually dismiss the second and third releases as they are generally not significant enough to meaningfully alter the growth picture.
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.