The US is gearing up to release its GDP growth data at 13:30 GMT on Thursday, with the markets keenly eyeing the possibility of an upside surprise. Recent economic indicators have painted a picture of resilience in the US economy, leading to a shift in traders' expectations regarding the Federal Reserve's interest rate policy. The start of the new year has seen the US dollar strengthen, buoyed by robust inflation and retail sales figures that defy the narrative of a slowing economy.
Investor sentiment has notably shifted, with the probability of a Fed rate cut in March plummeting from nearly 90% last month to just 45% now. This recalibration follows stronger-than-expected economic data, suggesting that the US economy retains its momentum. The labor market's continued strength further diminishes the urgency for immediate rate cuts. Several Fed officials have echoed this sentiment, cautioning that the market may be overly optimistic in its expectations for rapid rate reductions.
The impending GDP data thus carries significant weight, potentially swaying market dynamics and influencing the dollar's trajectory. Economists project a 1.8% annualized growth rate for Q4 2023, fueled by government spending and sustained consumer spending. However, the Atlanta Fed's GDPNow model, known for its accuracy, estimates a higher growth rate of 2.4%, hinting that an upside surprise is more probable than not. If this model's prediction materializes, it could reinforce the dollar's strength as the market scales back on aggressive Fed rate cut bets.
The euro/dollar pair, already on a downward trend this year, could see further declines if the US data continues to impress. A robust GDP report might drive the pair towards its recent low around 1.0840, aligning with the 200-day simple moving average. Conversely, a weaker-than-expected GDP figure could boost the euro/dollar, with the 1.1000 level emerging as a key resistance point. Moreover, this week's release of the core PCE price index on Friday is another critical data point that could impact the dollar's trajectory.
Considering the broader economic landscape, the dollar's prospects remain favorable. The US economy's relative strength compared to regions like the Eurozone, potentially already in a technical recession, suggests a more cautious approach by the Fed in reducing interest rates compared to the ECB. Historically, the dollar tends to perform well in late-cycle environments, particularly when the US economy outpaces global counterparts.
Additionally, the recent rally in stock markets, which has reduced the demand for safe havens like the dollar, might see a reversal if the optimism about rate cuts diminishes. This shift could provide another boost to the dollar. In summary, with a strong GDP reading on the horizon and a more robust economic performance than its global peers, the dollar's upward trajectory seems well-supported, potentially influencing the Fed's monetary policy and global currency dynamics.