US GDP expands at an annual rate of 4.9% in Q3 vs. 4.2% expected

• US GDP expands at a 4.9% annual rate in Q3. 
• US Dollar slides across the board after the release of US economic reports. 

The real Gross Domestic Product (GDP) of the US expanded at an annualized rate of 4.9% in the third quarter, the US Bureau of Economic Analysis' (BEA) first estimate showed on Thursday. This reading followed the 2.1% growth recorded in the second quarter and surpassed the market expectation of 4.2%.

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

The price index for gross domestic purchases increased 3.0%. The Personal Consumption Expenditures (PCE) Price Index increased 2.9%, compared with an increase of 2.5% of the previous quarter. Excluding food and energy prices, the PCE Price Index increased 2.4%, below the 3.7% of Q2. 

On Friday, the monthly Core Personal Consumption Expenditure (PCE) Price Index, which is the Federal Reserve's preferred inflation gauge, will be released. It is a more accurate indicator than the one included in the GDP report, as it provides a specific monthly data point rather than an average.

Market reaction

The US Dollar experienced broad-based weakness following the release of GDP data and the Jobless Claims and Durable Goods Orders reports. While the US Dollar Index is still up for the day, trading around 106.65, it has retreated from its earlier highs.

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This section below was published as a preview of the US Q3 GDP at 07:00 GMT.

• United States' Gross Domestic Product is forecast to grow at an annual rate of 4.2% in Q3.
• The US Dollar is in a bearish corrective phase ahead of the release. 
• After data released by the US Bureau of Economic Analysis, the market sentiment will determine USD direction.

The Gross Domestic Product (GDP) report for the third quarter, to be released by the Bureau of Economic Analysis (BEA) on October 26th, is expected to show an expansion of the US economy at an annualized rate of 4.2% after the 2.1% expansion recorded in the second quarter's GDP report.

The US Dollar (USD) has been easing against its major rivals after reaching fresh year tops in early October on the back of speculation the Federal Reserve (Fed) will refrain from hiking rates any further. Policymakers, Fed Chairman Jerome Powell included, had suggested that high government bond yields are tightening monetary conditions enough to prevent them from acting. Even further, Powell noted that a recession is no longer a base case scenario for the central bank when he announced the September monetary policy decision. However, financial markets remain concerned about economic progress, and the recent war between Israel and the Palestinian group Hamas has revived concerns about global growth. 

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 third quarter, scheduled at 12:30 GMT. The first estimate is expected to show that the world's largest economy expanded by 4.2% in the three months to September, more than doubling the previous quarter’s reading. 

If that’s the case, financial markets will likely feel more optimistic. The US Dollar may strengthen, but its gains could be limited by a risk-on mood, boosting demand for high-yielding assets. 

However, how positive would substantial growth be? Investors should consider the Federal Reserve (Fed) factor before rushing into trading the news.

Fed Chairman Jerome Powell has said the central bank needs below-trend growth for inflation to return to the 2% target. So far, the American economy has remained resilient, with the labor market barely loosening. Hence, substantial growth is playing against the case of taming inflation. There are good chances the figures result even better than anticipated, given continued job growth and increased consumer spending. Financial markets could initially welcome the news, but in the long run, growth momentum needs to decelerate to balance the economy. 

“The US economy continued to show remarkable resilience over the summer with surprisingly robust job growth and an unexpected consumer spending spree that likely propelled real GDP growth above 5% annualized in (the third quarter),” Gregory Daco, chief economist at EY-Parthenon, wrote in an analyst note.

When is the GDP print released, and how can it affect EUR/USD?

The US GDP report will be released at 12:30 GMT on Thursday. Ahead of the event, the US Dollar is in a corrective slide after achieving extreme overbought conditions, particularly against the Euro. 

EUR/USD slid continuously throughout the quarter, peaking for the year at 1.1275 in July, with the subsequent run south establishing a 2023 low at 1.0447 early in October. Financial markets turned optimistic as the odds for additional Fed rate hikes plummeted following the September announcement. Furthermore, multiple Fed officials noted that soaring government bond yields somehow tightened monetary conditions and further helped them to stay pat. 

US Dollar losses, however, had been contained. This was partially due to the poor performance of other major economies and, lately, due to the unexpected Middle East conflict between Hamas and Israel. 

Back to GDP figures, an upbeat figure will likely boost the market’s optimism, limiting the USD's near-term bullish potential. On the other hand, a much worse-than-expected reading could fuel concerns benefiting the USD. 

Valeria Bednarik, Chief Analyst at FXStreet, notes about EUR/USD: “Despite the recent bottom and the following 250 pips recovery, EUR/USD retains the long-term bearish bias. This week's sharp retracement from near 1.0700 hints at still-high selling interest. Still, additional declines are limited by uncertainty about future economic performance at both shores of the Atlantic.”

She adds: “The 1.0520 provides near-term support, with a break through 1.0490 required for a steeper decline, with a test of the year low at sight. A break below the latter should spook buyers and open the door for a slide towards the 1.0320/40 price zone. The focus will be on a potential run through 1.0700 if the pair gains upward traction with the news. The next relevant resistance and potential bullish target comes in the 1.0770 region.”