US Growth to Show Acceleration Ahead of Elections

The USD rally continues as data validates a December rate hike

The first of three releases of U.S. third quarter gross domestic product (GDP) data will be published on Friday, October 28 at 8:30 am EDT. The advanced GDP is reported 30 days after the end of the quarter. The change in value of the goods and services produced by the U.S. in the third quarter is forecasted to be around 2.5% and signal a turnaround after a slow start to the year.

The USD was higher across the board against majors on Thursday as U.S. economic data has been mixed but expected to finish the week on a high note with he release of GDP data on Friday. The CME’s FedWatch tool shows a 90.7 probability that the rate will be unchanged in the November 2, Federal Open Market Committee (FOMC) meeting but the Fed futures prices show a 71.4 percent probability of a rate hike in December 14.

Next week’s FOMC meeting will be a subdued affair as the Fed will try to minimize any political bias ahead of the U.S. presidential elections on November 8.

The EUR/USD fell 0.071 percent in the last 24 hours. The single currency is trading at 1.0897 and broke through the 1.09 price level after a durable goods orders disappointed but were offset by rising pending home sales in the U.S. The political uncertainty that preceded the three debates by the members of the two major American parties has dissipated as Secretary Clinton has emerged as a leader with less than two weeks remaining to the elections.

The effect of the U.S. political risk due to the elections did not derail the upward trend of the USD in the third quarter of 2016. The greenback continues to be supported by the U.S. Federal Reserve tightening monetary policy, even if they central bank has not made any changes to its interest rate since last December. Macroeconomic headwinds have forced policymakers to capitulate on their four rate hike forecasts from earlier in the year and from the minutes from Fed meetings it seems almost a foregone conclusion there will be a rate increase in December.

The November FOMC meeting will come at a complicated time. Without a press conference it does have the ideal conditions for such a market moving decision. The Fed has said in the past that all meeting are live meetings, meaning they could hike the rate at any of them. The reality is that for such a heavily anticipated event the market will need the guidance from Fed Chair Janet Yellen that is usually offered by her statement and question from the financial press that will follow the December FOMC rate statement.

The release of the United Kingdom’s GDP data for the third quarter beat expectations with a 0.5 percent gain. The GBP was not able to gain much on the back of the economic indicator given that the ghost of a hard Brexit still looms over the economy. The depreciation of the pound has been the only signal that there is worse to come if Article 50 is invoked and the U.K. is no longer part of the European Union. The struggles of the Canada Europe Trade Agreement (CETA) will be tough lesson to Leave campaigners that are getting a possible template on how their trade negotiations will go if there is a hard breakup from the EU. European officials have made tough statements and will not offer the U.K. any concessions. The 8 year in the making CETA was almost sabotaged by a region in Belgium. There has been an amendment, but for now what was a ready to sign deal, has been pushed back as the amendment is reviewed.

Market events to watch this week:

Friday, October 28
8:30 am USD Advance GDP q/q

*All times EDT
For a complete list of scheduled events in the forex market visit the MarketPulse Economic Calendar

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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 has been published by The MarketWatch, Reuters, the Wall Street Journal and The Globe and Mail, and he also appears regularly as a guest commentator on networks including Bloomberg and BNN. 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