Dollar loses value after preliminary US GDP data – stable economy reduces chances for Fed rate cut

Yesterday, the dollar only strengthened for a moment after the ADP data then lost ground due to the publication of preliminary GDP results for the third quarter. Investors know that relying on a private report about employment changes and drawing conclusions from it in the context of NFP is not very useful. These two “figures” can indicate a large discrepancy. The market’s reaction suggests that economic growth data is more important, despite describing the past. In the short term it’s evident that ‘buyers’ currently dominate on the EUR/USD. We can see a correction of strong October drops this week.

From June to the end of August, the US economy grew at a rate of 2.8 percent year on year. The result was lower than forecasted (3 percent), but it’s still a solid performance. The details show that private consumption improved (3.7 percent) along with an increase in equipment investments (11.1 percent). Government expenditures also significantly impacted the result, primarily due to an increase in defense spending.

The effects of high-interest rates in the US are already visible. The housing construction and real estate investments sectors are struggling. The growth momentum which had previously been ensured by government financing programs is weakening. Many offices remain vacant (high vacancy rate in the USA) which hampers new projects. A notable increase in both import and export is observable. This increase can be considered a reflection of internal demand; or the effect of companies bringing their commodities into the US fearing an increase in custom’s duties.

Despite high interest rates in the country, financing conditions remain attractive due to high stock prices and low risk premiums. Yesterday’s data showed that the US economy should avoid a recession.

The problem for the Fed in the near future may ironically be too mild of an economic cooldown. If the drop in growth dynamics is not substantial enough, the risk of renewed inflation pressure increases. Yesterday’s publication should not push the Federal Reserve to cut rates more aggressively at the next meetings. If the data remains solid, it’s not unlikely that the Fed will take a “pause” and wait for further development of events.

Łukasz Zembik Oanda TMS Brokers