US Dollar Strengthens as GDP Exceeds Expectations
U.S. Dollar Gains Traction
The U.S. dollar saw a modest increase on Thursday following the release of data showing stronger-than-expected economic growth in the fourth quarter. The report suggests that the Federal Reserve may not rush to cut interest rates, considering the overall stability of the economy.
Euro Weakens Amid ECB Comments
Conversely, the euro experienced a decline against the dollar, influenced by mixed statements from European Central Bank President Christine Lagarde. While she indicated that it was premature to discuss rate cuts for the euro zone economy, she also acknowledged that the risks to economic growth remain tilted to the downside. The ECB ultimately chose to keep borrowing costs unchanged at its policy meeting on Thursday.
Market Response to GDP Data
The Bureau of Economic Analysis’s advance GDP estimate revealed that gross domestic product in the last quarter grew at a 3.3% annualized rate, surpassing the consensus forecast of 2.0% growth. This unexpected figure indicates significant economic strength, with minimal weaknesses.
Impact on U.S. Rate Futures Market
Following the release of the GDP data, the U.S. rate futures market adjusted its projections, with a 47% chance of easing at the March meeting, up from 40% the previous day. Additionally, the market has priced in a 91% probability for the first rate cut to occur at the May meeting.
Anticipation of Fed and ECB Actions
Next week, the Federal Reserve is anticipated to maintain its current stance. However, market participants will closely monitor Chair Jerome Powell’s comments to gauge the central bank’s readiness to initiate interest rate cuts. On the other hand, investors are predicting rate cuts of 130 basis points in 2024 for the ECB, in line with the level seen before the ECB statement, as opposed to the 150 bps discounted in mid-January.
Additional Economic Indicators
Aside from the GDP data, a separate report from the Labor Department showed an increase in initial claims for state unemployment benefits. Although the figures were higher than forecasts, their market impact was limited due to the overshadowing effect of the GDP data.
Performance of Other Currencies
Other currency pairs also experienced movement, with the dollar sliding versus the yen and sterling showing a slight decline.
