Dollar Gets Lift After Third-quarter GDP Trumps Expectations - EUR/USD Below 1.1600

Friday's stronger-than-expected US GDP print could extend the Dollar's rally into the new week, when attention will turn toward the FOMC meeting and President Donald Trump's decision on who will lead the Fed from February. 

The Dollar extended gains over the G10 basket during noon trading Friday after GDP figures showed the US economy shrugging off hurricane related disruption in the third-quarter.

US economic growth came in at an annualised rate of 3% during the three months to the end of September, much faster than the 2.6% pace of expansion forecast by economists, according to the latest Bureau of Economic Analysis data.

Stronger consumer spending, fixed asset investment and exports were all big drivers behind growth during the quarter. This was partially offset by weaker government spending and residential investment.

“Hurricanes hit the US in Q3, and the economy hit right back,” says Royce Mendes, an economist at CIBC Capital Markets. "Real GDP increased 3.0%, with few signs of adverse hurricane impacts.”

Friday’s data marked only a ten basis point deceleration from the pace of growth seen in the second quarter, when the economy accelerated sharply.

"Consumer spending held up relatively well, supported by the spike in auto sales related to the replacement of damaged and destroyed vehicles," says Mendes.

Friday’s growth number could also be seen as a vindication of Federal Reserve policymakers who have stayed the course toward higher interest rates so far in 2017. 

“A stronger US GDP print could prove to be the foundation for a more sustainable dollar rally into next week as the market gets ready for the FOMC,” says Boris Schlossberg, a managing director of foreign exchange strategy at BK Asset Management.

The Dollar extended gains over the bulk of the G10 basket, with South African Rand the sole exception, in response to the data. The Pound-to-Dollar rate was marked 0.38% lower at 1.3079 as a result. 

Meanwhile the Euro-to-Dollar rate dropped below the 1.1600 threshold for the first time since July, marking an extension of Thursday's weakness and bringing Friday's loss to 0.33%. 

Get up to 5% more foreign exchange by using a specialist provider by getting closer to the real market rate and avoid the gaping spreads charged by your bank for international payments. Learn more here.

Fed Leadership News-flow Favours A Stronger Dollar

In America, and elsewhere, traders are focused keenly on who will win the race to lead the Federal Reserve from 2018 onwards and Thursday saw incumbent Janet Yellen and one other rival more or less ruled out of the race.

The two surviving frontrunners are Stanford University economist John Taylor, who is perceived as a hawk likely to favour steeper interest rate hikes, and governor Jerome Powell who is known as a dove in favour of a more modest tightening.

Both the Fed chair and vice chair positions are vacant. If they are filled with Powell and Taylor then it could lead markets to recalibrate expectations for future interest rate hikes in the US - likely in a way that favours a stronger Dollar.

An announcement could be made as soon as the weekend but most likely before the end of the first week in November.

Tax Cuts and Reforms Clear Two Major Hurdles 

Another factor behind the US Dollar's recent bull-run higher is President Donald Trump’s drive to push some of the largest tax cuts in history through both congress and onto the statute book.

With the passing of the Republican’s 2018 budget bill through the senate and now the house of representatives, the President has overcome two major hurdles in recent weeks.

The budget bill provides scope for unfunded tax cuts that some have said may increase the budget deficit by up to $1.5 trillion.

That said, unfunded tax cuts that add to the deficit are those that are most likely to lift economic growth thereby boosting inflation expectations and raising the path of future interest rates implied by financial market prices.

Higher interest rate expectations are the primary transmission mechanism through which tax cuts lead to a stronger US Dollar.

Get up to 5% more foreign exchange by using a specialist provider by getting closer to the real market rate and avoid the gaping spreads charged by your bank for international payments. Learn more here.