Stellar US GDP Drives Dollar – What Will it Mean for Fed Policy?

For weeks now, both USD bulls and bears have had today marked on their calendars as one of the most important days for US economic data of the entire summer (see “USD Bulls on Parade!” for more). While we’re only in the eye of the economic data storm right now, the first round undoubtedly went to the bulls.

ADP: Ho-Hum

The first fundamental salvo came from the monthly ADP employment report at 8:15am ET (12:15 GMT). This report is typically seen as one of the most reliable leading indicators for Friday’s marquee Non-Farm Payrolls report, and due to the way the dates fall this month, two of the other “leading” indicators for NFP (ISM Manufacturing and Non-Manufacturing PMI) will not be released until after Friday’s jobs report, so this month’s ADP report was particularly widely-watched. As it turns out, the data came in roughly in-line with expectations at 218k new jobs vs. 234k eyed, and the lack of revisions to previous reports meant that this report had only a minimal effect on traders.

GDP: So Nice Traders Had to Look Twice

Shortly thereafter, the US government released its first estimate of Q2 GDP at 8:30am ET (12:30 GMT). After a weather-impaired -2.9% reading in Q1, the market needed a strong report to convince traders that the US economy truly was accelerating out of the muddle-through recovery of the past few years. When the number first came out, traders had to rub their eyes to make sure they hadn’t misread it; Q2 GDP came out at a whopping 4.0%, far better than the 3.0% expected by the market, and the Q1 GDP measure had been revised higher to just -2.1%. Taken together, these figures show that the US economy grew at an acceptable pace in Q1, despite the inclimate weather and optimism is now elevated heading into the rest of the H2.

What Will the Stellar GDP Reading Mean for Fed Policy?

As you might expect, the US dollar surged higher on the back of the stellar GDP reading. The greenback reached new multi-month highs against most of its major competitors, including the euro, yen, swiss franc, Canadian dollar, and New Zealand dollar. From here, the big question is, “How will today’s GDP reading impact Federal Reserve policy moving forward?”

We’ll get our first insight in just a few hours, when the Fed will conclude its July meeting. At this point, another $10B taper seems all but inevitable, but the key factor for traders will be the accompanying statement. If the statement opens the door for rate hikes earlier than the FOMC had hinted at before, the USD could easily extend its rally across the board. On the other hand, if the statement is effectively a carbon copy of the previous statements, the buck may take a breather, but the longer-term momentum still remains to the topside.