US Dollar Climbs After Surprisingly Strong GDP Data

What’s going on here?

The US dollar jumped on Thursday after GDP data showed stronger-than-expected growth, lowering the odds of a big Fed rate cut next month.

What does this mean?

The US economy grew at an annualized rate of 3.0% in Q2, up from the previously reported 2.8% and well above the 1.4% growth in Q1. This beat economists’ expectations of 2.8%. Initial jobless claims also fell by 2,000 to a seasonally adjusted 231,000 for the week ending August 24, while continuing claims rose slightly, indicating a mixed labor market. This strong economic showing reduces the likelihood of the Fed opting for a bigger 50 basis point rate cut in September. A 25 basis point cut now seems more probable, with US rate futures showing a 35% chance of a 50 basis point cut, down from 37%. The dollar climbed 0.4% to 101.49, marking its largest weekly gain since April. Month-end flows and position adjustments also contributed to its strength.

Why should I care?

For markets: Navigating the waters of uncertainty.

The dollar’s rise comes as investors weigh the US economy’s resilience against potential Fed rate cuts. A less aggressive cut could temper expectations for rapid easing, impacting sectors reliant on lower borrowing costs. Keep an eye on the upcoming US core PCE price index report for more insights into the Fed’s potential moves.

The bigger picture: Global economic shifts on the horizon.

In the euro zone, inflation dropped in six major German states in August, suggesting a potential national decrease, while Spanish inflation slowed to its lowest pace in a year. This puts pressure on the ECB, with markets now pricing in 67 basis points of rate cuts in 2024. The global tug-of-war between inflation control and economic stability continues to shape monetary policies across major economies.