US Dollar Rises Slightly After Upward GDP Revision, But Faces Worst Month of 2024
The US dollar edged higher on Thursday following revised data showing that the US economy grew at a marginally stronger pace in the second quarter than initially reported. Despite this uptick, the dollar has declined each week this month and is on track to record its worst performance of 2024.
The revised estimate for the second quarter's real GDP increased to 3.0%, up by 0.2 percentage points from the previous estimate, driven by stronger consumer spending. However, downward revisions to investment and other key categories tempered the overall outlook. Confidence remains high that the Federal Reserve (Fed) will soon begin easing monetary policy, encouraging traders to seek higher yields in currencies like the New Zealand dollar and Swedish krona. While the US dollar is attempting to recover some recent losses, a significant rebound appears unlikely if market expectations about the Fed hold true.
Next week’s August jobs report could reveal further labour market weaknesses, potentially prompting the Fed to initiate its easing cycle with a more aggressive 50-basis-point rate cut in September. Meanwhile, the Fed’s preferred inflation measure, the PCE price index, is due today and could influence the dollar’s performance, especially if it exceeds expectations, providing some support as the month closes.
Pound Set for Largest Monthly Gain Since November Despite Pullback from 2-Year Highs
Despite the pound retreating from its 2-year highs against the US dollar, it remains on track to achieve its largest monthly gain since November, standing over 6% above its 2-year average rate of approximately $1.24. The Bank of England’s (BoE) broad sterling index is also approaching the July peak, which represents its highest level since the Brexit vote in June 2016.
In other currency pairs, GBP/EUR is nearing the €1.19 level—a mark it has surpassed for only 16 days in the past two years. The pound's strength has been fueled by stronger-than-expected UK economic data, contrasting with growing concerns in both the Eurozone and the US. This has led the BoE to caution against aggressive policy easing, with markets responding by pricing in just 40 basis points of cuts for this year. Consequently, FX options traders are more bullish on the pound's short-term prospects than they have been since 2020, as investors continue to reassess the relative interest-rate trajectories of the Fed and BoE.
However, with much of the Fed-driven dollar weakness already factored in, there’s no clear catalyst for the pound to push towards the $1.35 mark. Attention is now shifting to the upcoming decisions by the Fed and BoE, and particularly to UK Chancellor Reeves’ first budget at the end of October, which could play a pivotal role in determining whether sterling's bullish momentum can be sustained through the rest of 2024.
Euro Continues Decline Amid Softer European Inflation Data and Strong US Economic Performance
The euro extended its weekly decline to over 1%, dropping an additional 0.4% on Thursday due to weak preliminary inflation data from Europe and signs of robust US economic performance. Meanwhile, European stocks and bonds advanced as investors reacted positively to softer-than-expected German inflation figures, which are anticipated to influence the Eurozone's headline rate and fuel hopes for adjustments by the European Central Bank (ECB).
In August, Germany's preliminary annual inflation rate unexpectedly fell to 1.9%, below the forecasted 2.1% and down from 2.3% in the previous month. This marks the lowest rate since March 2021. On a monthly basis, the CPI edged down by 0.1%, contrary to expectations of a 0.1% increase. The EU-harmonised CPI also dropped to 2% year-on-year, below the anticipated 2.3%.
This downside surprise, along with similarly weak Spanish CPI data, has raised expectations that today's headline Eurozone inflation rate could come in lower than market consensus, increasing the likelihood of ECB easing. The central bank’s future policy path remains uncertain after it abandoned forward guidance in its July meeting. ECB official Patsalides indicated that further rate cuts are likely if the ECB's projections continue to hold. If the Eurozone inflation figure today comes in below expectations, European bonds are expected to advance further, which would be negative for the euro. However, the impact will largely depend on progress in the services and core inflation metrics, which have remained stubbornly high throughout the year.
