There are two crucial GDP figures to be released today; UK Q1 GDP initial reading will be released at 09:30 BST, followed by the US Q1 GDP annualized initial reading, Q1 PCE and Q1 core PCE inflation figures (QoQ) at 13:30 BST.
This will be the first US GDP figure reported after Trump took office. Presently the US economic condition remain sound – whereas, per the Q4 GDP annualized final reading, we saw a 2.1% growth showing a slowdown compared to a 3.5% growth in Q3. Market expectations for the upcoming Q1 GDP initial reading is 1.3%, which is lower than a 2.1% growth in Q4.
Growth around 2% is still sound however it shows a slowdown compared to the robust economic expansion over past decades. The reason for the recent slowdown is partially because of reduced consumer spending (especially on automobiles) caused by delayed tax returns and a warm winter. In addition; decreased corporate investment and government spending (Trump froze federal hiring ) also weighed on Q1 GDP growth.
However, the global economy is seeing a gradual recovery. Furthermore, the weakening of USD since the beginning of the year has boosted overseas demand for US products and US exports. In addition, the US job market is close to full employment which also provides Q1 GDP some support.
The US economic cycle is typically sluggish at start of year, then sees a revival in spring and summer. Therefore, the Q2 and Q3 GDP readings will likely see a better performance.
The dollar index saw a rebound over the past two days after hitting the lowest level of 98.55 since November 11. The current price is trading below the significant psychological level at 99.00.
Per the CME’s FedWatch tool the current probability for a rate hike in June is 67.6%. If the US Q1 GDP reading beats expectations, then we can expect an increase in the probability and further support to USD. Conversely, if Q1 GDP underperforms, it will likely weigh on USD and lower the probability of a rate hike in June.