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Why US GDP may weigh on the dollar

  • Updated US GDP figures have shown that the economy grew by 2% annualized in Q2.
  • Robust consumption outweighed a contraction in investment.
  • The odds of a rate cut have grown and the dollar may struggle.

Headlines do not always tell the full story – and that is the story in today’s US Gross Domestic Product report. The revised data for the second quarter has shown that the economy grew by 2.0% in the second quarter – a minor downgrade from 2.1% originally reported – but exactly as expected.

This is well within the “new normal” rate of growth – but looking under the hood reveals some issues.

The US consumer has borne the brunt of growth – 4.7% annualized against 4.3% in the initial read. Moreover, consumption has contributed 3.1% to overall growth.

On the other hand, home investment fell by 2.9% according to the new figures – almost double the initial release of 1.5%. Business investment fell by 0.6% – as originally reported – but confirming the first contraction since 2016.

Both components of investment dragged growth down by 1.1%, while other components such as trade and government spending balanced each other.

Fed set for looser monetary policy

The Federal Reserve convenes in three weeks and markets expect it to cut  rates  once again – and the case is stronger now. The Fed’s horizon is the medium term – the next year to three years – and investment decisions taken now have an impact on the economy then. Despite upbeat consumption, high employment, and rising wages now – the future looks uncertain.

As mentioned earlier, business investment contracted for the first time since 2016. Back then, the central bank planned to raise rates four times but settled for one hike at the back end of the year. Weak investment numbers contributed to the Fed’s hesitance back then – and may push the Washington-based institution to looser monetary policy in 2019 as well.

Markets have shrugged off the  news  due to the “as-expected” headline and the focus on trade headlines. However, the greenback has room to the downside.

Yohay Elam

Yohay Elam

Yohay Elam: Founder, Writer and Editor I have been into forex trading for over 5 years, and I share the experience that I have and the knowledge that I've accumulated. After taking a short course about forex. Like many forex traders, I've earned a significant share of my knowledge the hard way. Macroeconomics, the impact of news on the ever-moving currency markets and trading psychology have always fascinated me. Before founding Forex Crunch, I've worked as a programmer in various hi-tech companies. I have a B. Sc. in Computer Science from Ben Gurion University. Given this background, forex software has a relatively bigger share in the posts.