Is the US economy on a solid path in Q3? That's the big question on everyone's mind as we await the GDP report. The fate of the US Dollar hangs in the balance.
The Bureau of Economic Analysis (BEA) will unveil the first glimpse of Q3's Gross Domestic Product (GDP) on Tuesday, and analysts are buzzing with predictions. They're expecting a healthy 3.3% growth rate, which, while lower than the previous quarter's 3.8%, still indicates robust economic progress.
But here's where it gets controversial: the focus isn't just on growth. The labor market is a cause for concern, and the Federal Reserve's (Fed) monetary policy decisions are under the microscope. The GDP Price Index, which measures inflation across domestic goods and services, will also be released alongside the GDP headline.
The Atlanta Fed's GDPNow model estimates real GDP growth at 3.5% for Q3, but it's important to note that this is not an official forecast. It's a running estimate based on available data, and it could change as more information becomes available.
And this is the part most people miss: the labor market's performance in Q2, with solid job creation, contributed to stable consumption levels. However, the labor market has since weakened, with the Unemployment Rate rising to 4.6% in November. This could significantly impact GDP, potentially dragging it down.
So, when the GDP print is released, will it confirm the forecasts and the Atlanta Fed's model, or will the weakened labor market tell a different story? How will this impact the US Dollar Index?
The US GDP report is scheduled for 13:30 GMT on Tuesday, and it's expected to move markets, especially the USD. Given the ongoing winter holidays and reduced trading volumes, the market reaction could be more pronounced.
FXStreet Chief Analyst Valeria Bednarik notes that the US Dollar Index (DXY) is technically bearish, hovering around 98.30 ahead of the announcement. A negative GDP reading could push the DXY further down, potentially towards the monthly low of 97.46. Conversely, a better-than-expected figure could provide some relief for USD bulls, but it's unlikely to reverse the predominant bearish trend.
The US Dollar (USD) is the world's most traded currency, accounting for over 88% of global foreign exchange turnover. Its value is heavily influenced by monetary policy, which is the domain of the Federal Reserve. The Fed's two mandates - price stability and full employment - are achieved through interest rate adjustments. When inflation is high, the Fed raises rates, boosting the USD's value. Conversely, when inflation is low or unemployment is high, the Fed may lower rates, which can weigh on the Greenback.
In extreme situations, the Fed can print more Dollars and implement quantitative easing (QE) to increase credit flow in a stuck financial system. This non-standard policy measure is a last resort when lowering interest rates isn't enough. It was used during the Great Financial Crisis in 2008, and it typically leads to a weaker US Dollar. The reverse process, quantitative tightening (QT), is usually positive for the USD.
The Gross Domestic Product Annualized, released quarterly by the BEA, is a key economic indicator. It measures the value of final goods and services produced in the US, and changes in GDP reflect the nation's economic health. A high reading is generally bullish for the USD, while a low reading is bearish.
The first GDP estimate is typically the main market mover, with positive surprises boosting the USD and disappointing prints weighing on it. The second and third releases are usually dismissed by market participants as they rarely alter the growth picture significantly.
So, will the US GDP confirm solid economic activity in Q3? Or will the weakened labor market tell a different story? The upcoming GDP report will provide some answers, and its impact on the US Dollar Index will be closely watched.
