27-7-2023 (NEW YORK) The United States’ real Gross Domestic Product (GDP) surged at an annualized rate of 2.4% in the second quarter, surpassing market expectations and outpacing the 2% growth recorded in the first quarter, as per the US Bureau of Economic Analysis’ (BEA) first estimate revealed on Thursday.
The notable expansion in real GDP was attributed to increased consumer spending, nonresidential fixed investment, state and local government spending, private inventory investment, and federal government spending. These positive factors were partly offset by declines in exports and residential fixed investment, while imports, which are deducted in the GDP calculation, decreased during the period.
Additionally, the GDP Price Index, a key measure of inflation, dropped to 2.6% in the second quarter, down from 4.1% in the first quarter, indicating a deceleration in inflationary pressures. Similarly, the Core Personal Consumption Expenditures, another crucial inflation indicator used by the Federal Reserve, declined to 3.8% in the second quarter, compared to 4.9% in the previous period.
Market Reaction:
The upbeat GDP reading strengthened the US Dollar, leading to the US Dollar Index posting slight daily gains at 101.12.
Insights on the US GDP Report: Before the release of the Q2 GDP report on Thursday, July 26, there were expectations that the first top-tier US economic report after the FOMC meeting would be closely monitored due to the Federal Reserve’s ‘data-dependent’ approach to monetary policy. Hence, the growth and inflation numbers from the GDP report held significant importance.
The GDP Price Index and Core Personal Consumption Expenditures were particularly scrutinized as they provide insights into inflationary trends, influencing monetary policy decisions by the Federal Reserve.
As for the US Dollar Index, positive data from the GDP report could further support the currency, maintaining its strength amid favorable growth and inflation figures.
The US Bureau of Economic Analysis (BEA) is set to release the first estimate of the second-quarter Gross Domestic Product (GDP) on Thursday, July 27th, at 12:30 GMT. Market forecasts predicted the US economy’s expansion at an annualized rate of 1.8% in Q2, following the 2% growth rate recorded in the first quarter.
This release holds immense significance as it marks the first major economic report following the Federal Reserve meeting, and the central bank’s data-dependent approach to monetary policy adds further importance to the Q2 GDP figures.
Besides the overall growth rate, investors and analysts will closely observe other figures in the BEA report, such as the Core Personal Consumption Expenditures (PCE) Index, a crucial inflation measure, and the GDP Price Deflator, which indicates price changes in the GDP.
The US Durable Goods Orders and the weekly Jobless Claims reports are also scheduled to be released, along with European Central Bank (ECB) President Christine Lagarde’s post-meeting press conference. As markets continue to digest the outcome of the FOMC meeting, volatility is expected to prevail.
Possible Impact on US Dollar:
If the Q2 GDP report exceeds expectations with higher growth figures and hotter inflation numbers, the US Dollar could rally significantly against other currencies. Such a scenario would indicate the likelihood of the Federal Reserve raising interest rates again and showcase the US economy’s resilience despite monetary policy tightening.
On the other hand, if the Q2 GDP report shows growth in line with expectations and decreases in inflation indicators, such as the Core PCE Index or the GDP Price Deflator, it could weigh on the US Dollar, possibly pushing down US Treasury yields. This may support the scenario of no further rate hikes from the Fed.
However, the worst outcome for the US economy would be higher inflation coupled with lower growth, potentially triggering expectations of rate cuts in the future.
US Dollar Index Outlook:
The US Dollar Index (DXY) has shown signs of recovery, rising from one-year lows below 100.00 to 101.65, with the 20-day Simple Moving Average (SMA) serving as resistance. Although the primary bias remains bearish, the DXY’s ability to stay above 101.00 could lead to a test of the crucial SMA and a potential sustained rally.
In contrast, a drop below 101.00 may renew bearish pressures, pushing the DXY towards 100.00 and even the year-to-date low at 99.56, signaling a continuation of the bearish trend that began in November of the previous year.
