US GDP should encourage the Fed – and the dollar

• US GDP has come out at 2.1%, above expectations.
• The Federal Reserve is watching the data very closely.
• The USD has room to rise ahead of the central bank’s decision.

The US economy is alive and kicking – hardly justifying the planned Fed rate cut next week – and certainly not a pre-announcement about a full loosening cycle. On this background, the greenback can continue rising.

The economy grew by an annualized rate of 2.1% against 1.8% expected. Personal consumption jumped by 4.3%  – as expected – but a robust rate in absolute terms. Moreover, headline GDP was held back by falling inventories – which are likely to rise in the following quarter.

Core prices rose by 1.8% annualized – unimpressive but far from indicating the Fed failing to reach its 2% inflation target. All in all, the first estimate of GDP shows that current economic activity is robust.

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The prospects for the Fed to signal a long cycle of rate cuts were already slim beforehand. When James Bullard – the President of the Saint Louis Fed and a known dove  – talks only about an “insurance cut”, it is hard to see how Chair Jerome Powell or anybody else can “outdove” him.

Moreover, the labor market has returned to its normal self, the consumer is out on a shopping spree, and perhaps more importantly – the US and China are resuming trade talks.

The central bank has few reasons to be worried – at least for now. A rate reduction worth 50 basis points now seems far from reality.

On this background, the US dollar has significant room to extend its gains now and also leading into the Jerome Powell decision.

The most vulnerable currencies are probably the euro – which awaits a significant easing package from the European central – and the pound, that suffers from fresh UK-EU clashes over Brexit. Commodity currencies may drop but may find comfort in the fact that the US is growing at a rapid clip – something that could spill over to them.