US GDP grows at annual rate of 1.1%, US Dollar rallies on knee-jerk reaction

The US economy expanded at an annualized rate of 1.1% in the first quarter of 2023, the US Bureau of Economic Analysis' (BEA) first estimate showed on Thursday.

This reading followed the 2.6% growth recorded in the last quarter of 2022 and came in worse than the market expectation for an expansion of 2%.

Further details of the report revealed that the GDP Price Index edged higher to 4% in the same period from 3.9%, compared to the market expectation of 3.8%. On a quarterly basis, the Personal Consumption Expenditures (PCE) Prices rose to 4.2% from 3.7%.

Follow our live coverage of market reaction to the US GDP report.

"The increase in real GDP reflected increases in consumer spending, exports, federal government spending, state and local government spending, and nonresidential fixed investment that were partly offset by decreases in private inventory investment and residential fixed investment," the BEA explained in its publication. "Imports, which are a subtraction in the calculation of GDP, increased."

Market reaction

Despite the disappointing GDP data, the US Dollar Index has gained traction and climbed toward 101.70 following a mixed knee-jerk reaction. The stronger-than-expected increase in the inflation component of the GDP, which could allow the Federal Reserve (Fed) to delay a policy pivot, seems to be helping the US Dollar find demand. Additionally, the 2.26 percentage point negative contribution of the change in private inventories, as highlighted in the table below, seems to be making the GDP reading look worse than it actually is since inventories tend to fluctuate.

Commenting on the same matter, "the US economy grew 1.1% in the first quarter of 2023, slower than in the previous quarter (2.6%). However, the main drag came from significantly lower inventory accumulation, while private consumption remained strong. We still expect the economy to contract slightly in the second half of the year due to the Fed's hefty rate hikes," Commerzbank analsysts noted.

The benchmark 10-year US Treasury bond yield continues to stretch higher toward 3.5% and was last seen rising 1% on a daily basis. Furthermore, US stock index futures are up between 0.55% and 1.1%, pointing to a positive opening in Wall Street.

US GDP is forecast to grow at an annual rate of 2.0% in the first quarter of 2023.
The US Dollar value will probably continue to be determined by risk perception.
After data released by the US Bureau of Economic Analysis, markets will pay close attention to Q1 earnings reports.

The Gross Domestic Product (GDP) report for the first quarter of 2023, as released by the US Bureau of Economic Analysis (BEA) on April 27th, is expected to show an expansion of the US economy at an annualized rate of 2.0%, after the 2.6% growth recorded in the GDP report for the fourth quarter of 2022.

The US Dollar (USD) has been weakening against its major rivals since early March after the collapse of the Silicon Valley Bank reminded markets of the negative impact of the Federal Reserve’s (Fed) tight monetary policy on the financing conditions. The GDP report will provide fresh clues regarding the state of the United States economy in early 2023 and drive the US Dollar’s action by influencing the market pricing of the Fed’s policy outlook.

US Gross Domestic Product forecast: What numbers could tell us

Thursday's US economic docket highlights the release of the preliminary GDP print for the first quarter, scheduled at 12:30 GMT. The first estimate is expected to show that the world's largest economy expanded by 2.0% at an annualized pace during the January-March period.

Yohay Elam, FXStreet Senior Analyst, thinks markets will pay close attention to the severity of the slowdown in the first quarter’s economic activity.

“There is no doubt that the US economy is slowing, but the pace matters. A deceleration to 2% would be the sweet spot for markets – ongoing expansion without fears of an imminent recession,” Elam explains. “It would represent a return to the "new normal" GDP growth figures that characterized the post-financial crisis era. Conversely, a faster clip would stoke fears of further rate hikes by the Fed, while slower growth would raise recession angst. The middle 2% would be Goldilocks for markets and adverse for the US Dollar.”

When is GDP report released and how can it affect EUR/USD?

The GDP report is scheduled for release at 12:30 GMT on Thursday. The US Dollar stays dangerously close to multi-month lows against the Euro ahead of this data amid diverging policy outlooks between the European Central Bank (ECB) and the Fed.

Although the backward-looking data might do little to influence market expectations about the Fed's next policy move, it could revive fears over the US economy tipping into recession later in the year. In that scenario, the Fed “policy pivot” narrative could gain traction and force the USD to stay on the back foot. That said, an upward surprise of the US GDP print could revive expectations about the Fed staying focused on battling inflation and help the Greenback stage a rebound, at least with the initial reaction.

According to the CME Group FedWatch Tool, markets are nearly fully pricing in one more 25 basis points (bps) Fed rate hike at the May 2-3 policy meeting but seeing a more than 80% probability that there will be an at least one 25 bps rate cut by September policy meeting.

Eren Sengezer, Senior Analyst at FXStreet, shares his technical outlook for EUR/USD: “The Relative Strength Index (RSI) indicator on the daily chart stays near 60, suggesting that EUR/USD has more room on the upside before turning technically overbought. Additionally, the gap between 20-day Simple Moving Average (SMA) and the 50-day SMA continues to widen following the bullish cross seen in early April, supporting the bullish view.”

Eren also points out the key technical levels for the pair: “1.1100 (psychological level) aligns as next resistance for the pair ahead of 1.1160 (static level from March 2022). With a daily close above the latter, the pair could face interim resistance at 1.1200 (psychological level, static level) before targeting 1.1300 (psychological level, static level). On the downside, 1.1000 (20-day SMA, psychological level) forms first support ahead of 1.0900 (static level) and 1.780/1.0760 area (50-day SMA, 100-day SMA).

US GDP-related content

Gross Domestic Product FAQs

What is GDP and how is it recorded?

A country’s Gross Domestic Product (GDP) measures the rate of growth of its economy over a given period of time, usually a quarter. The most reliable figures are those that compare GDP to the previous quarter e.g Q2 of 2023 vs Q1 of 2023, or to the same period in the previous year, e.g Q2 of 2023 vs Q2 of 2022.
Annualized quarterly GDP figures extrapolate the growth rate of the quarter as if it were constant for the rest of the year. These can be misleading, however, if temporary shocks impact growth in one quarter but are unlikely to last all year – such as happened in the first quarter of 2020 at the outbreak of the covid pandemic, when growth plummeted.

How does GDP influence currencies?

A higher GDP result is generally positive for a nation’s currency as it reflects a growing economy, which is more likely to produce goods and services that can be exported, as well as attracting higher foreign investment. By the same token, when GDP falls it is usually negative for the currency.
When an economy grows people tend to spend more, which leads to inflation. The country’s central bank then has to put up interest rates to combat the inflation with the side effect of attracting more capital inflows from global investors, thus helping the local currency appreciate.

How does higher GDP impact the price of Gold?

When an economy grows and GDP is rising, people tend to spend more which leads to inflation. The country’s central bank then has to put up interest rates to combat the inflation. Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold versus placing the money in a cash deposit account. Therefore, a higher GDP growth rate is usually a bearish factor for Gold price.

When does the next United States Gross Domestic Product Annualized take place?

United States Gross Domestic Product Annualized is taking place on Thursday, May 25 th at 12:30 GMT.

Stay tuned to all the upcoming events that may affect the markets on our economic calendar.

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