Will the Report Boost Fed Rate Cut Bets?

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US Dollar, US GDP – TALKING POINTS

  • US Dollar, stock markets brace for Q2 GDP data
  • How will it impact Fed monetary policy outlook?
  • Trade wars, weaker investment weighing on growth

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The US Dollar and equity markets will be anxiously waiting to see the publication of finalized 2qwUS GDP data. On an annualized quarter-on-quarter timeframe, analysts are forecasting a 2.0 percent growth rate for Q2, in line with the second point. Traders will also be eager to see the release of core Personal Consumption Expenditure data, a well-known favorite indicator of the Fed.

According to the Citi Group Economic Surprise Index, US data has been tending to perform better than expectations, so it is possible US growth could fall in line with this broader trend. A faster-than-expected growth rate could dent equity markets and push the US Dollar higher if it cools Fed rate cut bets. But how dovish is the Fed?

San Francisco Fed President Mary Daly has acknowledged that the Fed has become a lot more accommodating since 2018. However, when assessing the fundamental outlook, this comes to no surprise with trade war uncertainty weighing on business confidence and undermining cross-border investment and job creation. However, despite these headwinds, Mr. Powell has reiterated that the Fed is on a data-dependent path.

He has reiterated the central bank will adjust rates in accordance to prevailing economic conditions, should they warrant it. Despite two rate cuts this year, Mr. Powell has stressed that this is not the start of an easing cycle but rather these credit easing measures were used as an insurance policy against downside risks. He did mention, however, that if conditions substantially worsen, the Fed will act accordingly and cut rates.

But, the markets’ hope of ultra-easing credit conditions may be dashed if local GDP data shows the US economy grew at a faster-than-anticipated rate, which would undermine the impetus for the Fed to cut rates. This could in turn sour market expectations for easing and lead to investors shifting capital to the US Dollar and away from equity markets.

Chart of the Day: US Dollar Strength Prevails Despite Downward Pressure of Fed Rate Cut Bets Amid Rising Demand for Liquidity

US Dollar Index chart created by TradingView

US DOLLAR TRADING RESOURCES

— Written by Dimitri Zabelin, Jr Currency Analyst for DailyFX.com

To contact Dimitri, use the comments section below or @ZabelinDimitrion Twitter

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