US Dollar Boosted by Upward Revision to Third-quarter GDP and Tax-talk

US growth accelerated in the third-quarter, while progress on tax-reforms and surging consumer confidence could mean it rises further in the months ahead.

The US Dollar extended earlier gains in noon trading Wednesday after third-quarter GDP growth was revised higher, adding further to an already positive mood around a Dollar that has been boosted by rising hopes of progress on tax-reform in Washington.

Growth picked up in the third quarter, with GDP expanding at an annualised rate of 3.3%, up from 3.1% in the previous period. This was higher than the 3% rate of growth born out by the advance estimate released in October, according to the Bureau of Economic Analysis report.

Fixed-asset investment, government spending and private sector inventory investment numbers were behind the move, after all were revised higher from their October estimates.

“With borrowing costs still relatively low, confidence strong and capex intentions surveys at elevated levels, we expect another decent gain in the fourth quarter,” says Paul Ashworth, chief North American economist at Capital Economics.

Lower imports and higher exports also helped to lift growth during the period, while residential fixed investment fell and so was a weight around the ankles of the economy for the quarter.

“After a good third-quarter, the survey and early monthly evidence point to another decent gain in GDP in the fourth quarter of between 2.5% and 3.0% annualised,” Ashworth adds.

The USD/JPY rate rose 30 points to 112.07 after the release, while the Pound-to-Dollar held steady after already having pared some of the morning's gains. 

The Pound-to-Dollar rate was quoted 0.30% higher at 1.3405 while the Euro-to-Dollar rate was marked 0.10% lower at 1.1837.

Above: Pound-to-Dollar rate shown at hourly intervals.

“Yesterday’s Senate Budget committee decision allows its tax plan to advance to the floor for a vote as soon as this week, sustaining optimism that tax cuts might still be implemented in short order and lifting USD sentiment, says Shaun Osborne, chief FX strategist at Scotiabank.

Tuesday saw traders reward Washington’s progress toward passing the Trump administration’s tax bill with a renewed bid for the Dollar, after the Senate Budget Committee passed its own version of the bill on for a vote in the chamber.

“Gains may extend modestly in the near term but we are skeptical that the USD’s bounce will be significant as tax cuts still face some significant hurdles and their economic impact is questionable,” says Scotiabank’s Osborne.

Once the senate bill is cleared, republicans from across congress will attempt to find common ground between the house and senate visions for the reforms before agreeing on a unified bill.

President Donald Trump held a meeting with republican leaders Tuesday and told reporters afterward the tax bill will be succesful - before claiming it could result in close to $4 trillion of overseas profits being repatriated back to the US.

Tuesday’s tax-talk and Wednesday’s GDP number come closely on the heels of November’s Conference Board consumer confidence report.

“The rise in the Conference Board consumer confidence index to a new 17-year high of 129.5 in November leaves it consistent, on past form, with real consumption growth of more than 6% annualised in the fourth quarter,” says Andrew Hunter, a US economist with Capital Economics.

The 6% growth implied by the Conference Board number is almost certain to prove too optimistic, according to Hunter, although high levels of confidence still provide grounds to think US economic growth will continue at a solid clip during the months ahead.

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