U.S. Dollar Unmoved by GDP Disappointment as Market Focus Shifts to the Fed's Jerome Powell

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- USD overlooks GDP disappointment as market eyes Jerome Powell.

- Revisions to consumption and investment leave Q3 GDP unchanged. 

- But Powell's looming speech will set tone for USD into December.

The Dollar was unmoved Wednesday by disappointing third-quarter GDP figures, although the greenback remains on its front foot ahead of an eagerly-awaited speech from Federal Reserve chairman Jerome Powell.

The U.S. economy grew at an annualised pace of 3.5% in the third quarter, unchanged from the earlier estimate published in October, although consensus had been for an upward revision to 3.6%.

Household consumption was weaker than previously thought during the quarter, although business investment was higher than the earlier estimate suggested, with the net effect being one of no change to the prior number. 

The Bureau of Economics Analysis said in October the economy grew at an annualised pace of 3.5% during the quarter which, although down from a 4.2% expansion previously, was still ahead of expectations for growth of 3.3%.

"With today's figures roughly in line with expectations, market reaction should be limited," says Katherine Judge, an economist at CIBC Capital Markets. 

The U.S. Dollar index was quoted 0.05% higher at 97.36 following the release Wednesday. The Pound-to-Dollar rate was 0.40% higher at 1.2789 while the Euro-to-Dollar rate was down -0.08% at 1.1287.

Wednesday's number is important for the Dollar and global currency market because investors are increasingly cognizant of the possibility that U.S. growth could slow over coming quarters, potentially leading the Federal Reserve to reappraise its current intentions around interest rates.

Fed officials dropped the well-worn line that monetary policy remains "accomodative" from their November statement and hinted that they intend to lift the Federal Funds so that it reaches as high as 3.5% in 2020. The Fed Funds range was lifted from 1.75%-2%, to between 2% and 2.25% back in September. 

"The Bloomberg Economic Surprise Index continues to slide," says Derek Halpenny, European head of markets research at MUFG. "So we still see reason to highlight to readers the risk of further evidence of slowing growth in the US that prompts increased speculation of a more cautious approach to monetary tightening by the Fed next year."

The next steps in Federal Reserve interest rate policy are important for the Dollar because it is the central bank's actions, which have been compelled by the superior performance of the U.S. economy, that have driven the greenback to the top of the G10 currency performance table this year. 

The Dollar has reigned supreme over all other currencies since April after it became clear the global economy was slowing and and growth in the U.S. was picking up, leading to monetary policy divergence among central banks.

This kind of divergence normally supports the Dollar while synchronised rate policies, and divergence in reverse, tend to hurt the greenback.

"A December rate hike is very likely and hence the dollar for now could well advance further, but we view gains over the coming weeks as probably the final leg of dollar appreciation before depreciation takes hold," Halpenny warns. 

Wednesday's GDP data comes just hours before Fed chair Jerome Powell is set to deliver a speech about how the bank monitors financial stability, at The Economic Club of New York, at 17:00 London time. 

The topic is a salient one given economist concerns about the impact Fed interest rate policy has had on financial stability in the emerging world, and the impact it could yet have on U.S. financial stability. 

The topic is also a helpful one because it will allow Powell to outline the kinds of scenarios that would lead the Fed to pause in its push to raise U.S. rates, thereby providing clarity to the market and Dollar about an important question.  

Anything Powell says that leads markets to conclude the Fed is already having second thoughts about its 2019/20 policy, or that the conditions for a pause are becoming ripe, would be sure to dent the U.S. currency. 

Likewise, any commentary that suggests the Fed will push on with its rate hikes, perhaps because it sees U.S. financial stability as being safeguarded by effective existing controls, could encourgage a fresh bid for the Dollar.

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