American GDP Could Drive Dollar Volatility

The pace of growth of the U.S. economy slowed down in the first quarter of the year. The advanced quarterly gross domestic product (GDP) came in well-below expectations at 0.2% on April 29. The forecast called for a 1% growth in the quarter after the American economy first showed signs of underachievement in the last quarter of 2014. The factors that shackled growth are many: a harsh winter, lower energy prices, a strong USD and the port disruptions on the West Coast. The second release of U.S. GDP data will be published on Friday, May 29 at 8:30 a.m. EDT.

Quarterly GDP data is published in three stages in the U.S. The first release is an advance GDP 30 days after the end of the quarter. That’s followed by preliminary GDP data 30 days later, with the final release being issued 25 to 30 days thereafter.

The USD was punished across the board following the preliminary release of GDP. Interest rate divergence has been the main driver of USD strength, but with the evidence of a weaker U.S. economy accumulating the market revalued the currency. The Federal Reserve has managed to restore some level of confidence in an interest rate hike coming later this year. The minutes from the Federal Open Market Committee (FOMC) and later Fed Chair Janet Yellen’s comments continue to show an upbeat tone. Their analysis of the first quarter slowdown was attributed to transitory factors.

The USD has regained some of the losses and the buck’s fate will depend on the second release of the GDP due on Friday. The biggest indicator in the forex market, the nonfarm payrolls (NFP) report, will be published on June 5.

The Fed has remarked time and time again that its decision to hike interest rates will be dependent on economic data. The problem facing the market is that in most cases that data is going to lag the actual pace of the economy. But in this case it seems the Fed would rather err on the side of waiting too long as opposed to acting too early and compromise the economy from regaining its footing.

External factors, the Greek debt crisis being the main one, continue to influence the forex market. With the deadline of June 5 fast approaching for Greece to repay the International Monetary Fund, the market is focused on the outcome of the debt negotiations. The market had priced in a faster recovery for the U.S. economy, which in turn appreciated the USD and hurt said fledging growth.

The second estimate of U.S. GDP data could show a contraction in the first quarter as big at 0.9%. The Fed has already addressed the disappointment in America’s first quarter results, but its policymakers remain optimistic about growth after the effects of said transitory factors recede.

Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza