- The US Gross Domestic Product is expected to grow at an annualized rate of 2% in the fourth quarter.
- The resilience of the US economy could allow the Fed to delay changing its monetary policy.
- Investors will also pay close attention to the reading of the Gross Domestic Product deflator.
The report on the Gross Domestic Product (GDP) for the fourth quarter, to be published on Thursday by the Bureau of Economic Analysis (BEA), shows an expansion of the US economy at an annualized rate of 2%following the impressive 4.9% growth recorded in the previous quarter.
After remaining under persistent bearish pressure in the final quarter of 2023, the US Dollar (USD) managed to stage a rebound in January. The DXY Dollar Index has risen almost 2% since the beginning of the year, with markets reassessing the timing of the Federal Reserve's (Fed) monetary policy shift.
US Gross Domestic Product Forecast: What the numbers could tell us
Highlighted on Thursday's US economic agenda is the publication of the preliminary GDP for the fourth quarter, scheduled for 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 2023a relatively healthy pace despite being much lower than the 4.9% expansion of the third quarter.
Inventory accumulation was the main driver of GDP growth in the third quarter. Given that this component tends to move in the opposite direction from quarter to quarter, it will not be a big surprise to see a sharp decline in the expansion rate towards the end of 2023.
Market participants will also pay close attention to the reading of the GDP Price deflator, also known as the Output Price Index, which measures changes in the prices of services and goods produced in the United States. The GDP price deflator rose to 3.3% in the third quarter, up from 1.7% in the second, suggesting that inflation had a greater positive impact on growth than in the second quarter.
“In terms of economic output, we expect real GDP to have posted quarter-on-quarter expansion of 1.6% in the fourth quarter, much slower than the spectacular and unsustainable 4.9% increase in the third quarter,” TD Securities analysts stated:
“As for the specifics, we expect consumer spending to have led the slowdown in activity (although it is likely to grow at a still decent pace), while inventories are expected to be a major drag. We also expect investment business outlook remains lower as capex appears to have remained largely depressed in the fourth quarter (investment in capital goods has contracted in five of the last six quarters). Even if our below forecast is met consensus, production is likely to continue growing at a very strong pace of 2.4% in 2023 (2.7% in the fourth quarter).”
When is the GDP published and how can it affect the Dollar?
The US GDP report will be reported on Thursday at 13:30 GMT. Ahead of the event, the Dollar is holding firm against its rivals due to growing expectations of a delay in the Federal Reserve's next rate cut.
Before the Federal Reserve's silent period began on January 21, Several policymakers opposed the market's anticipation of a 25 basis point (bp) Fed rate cut in March. San Francisco Fed President Mary Daly said she believes the central bank has a lot of work left to do to bring inflation back to the Fed's 2% target and argued that it is too early to think that ” “rate cuts are just around the corner.” Similarly, Atlanta Fed President Raphael Bostic noted that his baseline scenario is for rate cuts to begin sometime in the third quarter.
The probability of a 25 basis point rate cut in March, according to CME's FedWatch tool, fell below 50% in the second half of January from almost 80% in late December, reflecting the change in positioning of the markets.
Higher-than-expected GDP growth in the fourth quarter could fuel expectations that the Fed will likely refrain from lowering the policy rate in March and give a boost to the dollar as an initial reaction.. Should the GDP reading approach the market consensus of 2%, a GDP price deflator reading equal to or greater than 3% could help the dollar hold, while a fall towards 2% could hurt the dollar. The currency.
Besides, a disappointing growth figure below 1.5% could go against the “soft landing” narrative. In this scenario, markets could lean towards a Fed rate cut in March and trigger a decline in US Treasury yields, causing losses for the dollar against its main rivals.
Eren Sengezer, Chief Analyst of FXStreet's European session, shares a brief technical outlook on the US Dollar Index DXY:
“The Relative Strength Index (RSI) on the daily chart remains near 60, highlighting the short-term bullish bias. The 200-day SMA forms a key point in 103.50. In case the DXY index stabilizes above that level and starts using it as support, 104.40 (100-day SMA) and 105.00 (psychological level) could be the next bullish targets. On the opposite side, the 38.2% Fibonacci retracement of the October-December downtrend forms strong support at 103.00 before 102.50 (20-day SMA) and 102.00 (23.6% Fibonacci retracement).”
GDP FAQ
What is GDP and how is it recorded?
A country's Gross Domestic Product (GDP) measures the growth rate of its economy over a given period of time, usually a quarter. The most reliable figures are those that compare GDP with the previous quarter (for example, the second quarter of 2023 with the first quarter of 2023) or with the same period of the previous year (for example, the second quarter of 2023 with the second quarter 2022).
Annualized quarterly GDP figures extrapolate the quarter's growth rate as if it were constant for the rest of the year. However, they can be misleading if temporary shocks hit growth in one quarter but are unlikely to last all year, as was the case in the first quarter of 2020 with the outbreak of the coronavirus pandemic, when growth plunged.
How does GDP influence currencies?
A higher GDP result is typically 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 attract greater foreign investment. Likewise, when GDP falls it is usually negative for the currency.
When an economy grows, people tend to spend more, which causes inflation. The country's central bank then has to raise interest rates to combat inflation, with the side effect of attracting more capital inflows from global investors, which helps the local currency appreciate.
How does the increase in GDP influence the price of Gold?
When an economy grows and GDP increases, people tend to spend more, which causes inflation. So, the country's central bank has to raise interest rates to combat inflation. Higher interest rates are negative for Gold because they increase the opportunity cost of holding Gold versus placing money in a cash deposit account. Therefore, a higher GDP growth rate is usually a bearish factor for the price of Gold.
Source: Fx Street
I am Joshua Winder, a senior-level journalist and editor at World Stock Market. I specialize in covering news related to the stock market and economic trends. With more than 8 years of experience in this field, I have become an expert in financial reporting.
