DXY index at 106.7 as U.S. GDP blows by estimates in Q3

U.S. economy speeds up as GDP jumps 4.9%, DXY index at 106.7

The DXY dollar index, which measures the strength of the U.S. dollar against a basket of other major currencies, held steady around two-week highs at the 106.7 level on Thursday, as new figures showed the U.S. economy has surged ahead at its fastest rate in nearly two years, once again defying expectations of a slowdown.

According to the advance estimate provided by the Bureau of Economic Analysis, the U.S. gross domestic product (GDP) for the third quarter grew at an annualized rate of 4.9%, surpassing consensus forecasts. Economists surveyed by Bloomberg had projected an annualized growth rate of 4.5% for the same period, according to Yahoo Finance reporter Josh Schafer, while a Dow Jones survey had been looking for a 4.7% acceleration.

This figure is notably higher than the revised second-quarter GDP, which was adjusted down to 2.1%.

The release of the GDP data underscores the resilience of the U.S. consumer — before the quarter began, the economy was widely expected to slow in response to rising interest rates, as higher borrowing costs typically depress the economy. Nevertheless, many economists view this as the peak of economic growth before the effects of the Federal Reserve's interest rate hikes and the recent surge in bond yields start to affect business expansion and consumer spending.

Markets reacted little to the news, with stock market futures negative heading into the open and U.S. Treasury yields mostly lower.

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USD outlook: Markets pricing in Fed pause at next meeting, in spite of GDP jump

Although the report may offer the Federal Reserve some reasons to maintain a tight policy stance, traders remained skeptical of the possibility of an interest rate hike when the central bank convenes next week, as indicated by CME Group data.

Futures pricing indicated only a 27% probability of a rate hike during the December meeting, even after the release of the GDP figures.

Jeffrey Roach, chief economist at LPL Financial, told CNBC that the GDP boost was hardly a surprise:

“Investors should not be surprised that the consumer was spending in the final months of the summer. The real question is if the trend can continue in the coming quarters, and we think not.”

ING FX Strategist Francesco Pesole offered an overview of the USD outlook and recent dollar strength in a piece on October 26:

“The past 24 hours have seen a further strengthening of the dollar due to: a) fresh pressure on equities; b) oil prices moving back higher, and c) the US finally electing a new House Speaker. Republican Representative Mike Johnson, who is widely considered to be an ally of former President Donald Trump, was elected yesterday after a long standoff and will now face two key policy challenges: averting a government shutdown by 17 November and discussing funding for Israel and Ukraine.

The government shutdown is the most relevant issue from an FX perspective, as it could dampen the so-far very resilient US growth expectations. A new House Speaker was a necessary condition of averting a shutdown and that is contributing to a stronger dollar via yet higher yields. 10-year Treasuries are back around 5%.”

USD forecast: ING says dollar will turn lower as Fed pauses hikes

An earlier dollar forecast by ING’s Pesole and Chris Turner, issued on October 9, said the U.S. currency likely to fall further, as the bank saw a likely end to the Fed’s rate hike cycle putting USD on the back foot:

“The dollar has been stronger for a lot longer than we were expecting. 4% QoQ annualised US growth in 3Q23, helped by the US consumer, has kept the Fed in hawkish mode. We doubt, however, the Fed will need to hike rates again this year. And given our sub-consensus forecast of 0.2% US growth and a 200bp easing cycle next year, we still look for the dollar to turn lower.”

At the time of writing, the DXY index traded at 106.62, up 0.09% on the day, as per MarketWatch data. The euro to dollar rate slipped to $1.0545 (down 0.21%) following the European Central Bank’s decision to hold interest rates unchanged earlier this afternoon.

The dollar's strength and the euro’s relative weakness have led some Wall Street banks to forecast euro to dollar parity by the end of the year.

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