- The US Dollar remains soft after the Fed left rates unchanged and revised its inflation assessment.
- US GDP growth slowed to 2.3% in Q4, missing forecasts of 2.6% and down from 3.1% in Q3.
- The Fed removed prior language on inflation progress, stating it remains “somewhat elevated.”
- Powell’s mixed messaging led to uncertainty, initially pushing the DXY higher before erasing gains.
The US Dollar Index (DXY), which measures the value of the US Dollar against a basket of currencies, hovers below 108.00 as traders react to the Federal Reserve’s (Fed) latest decision and a weaker-than-expected US Gross Domestic Product (GDP) print. The Fed maintained its policy stance but removed previous references to inflation making progress toward the 2% goal, sparking hawkish speculation.
However, Powell later downplayed this shift, calling it a “language cleanup,” which softened the initial market reaction. Meanwhile, GDP growth missed expectations, while inflation components within the report suggested underlying price pressures persist.
Daily digest market movers: US Dollar struggles as GDP miss fuels uncertainty
- The Federal Reserve held interest rates steady at 4.25%-4.50% as widely expected but removed prior language stating that inflation was making progress toward the 2% target. This adjustment was initially seen as hawkish before Powell downplayed its significance.
- During the press conference, Powell clarified that the inflation language change was merely a “language cleanup” and not an intentional policy shift. His comments softened the market’s hawkish reaction and led to a pullback in the US Dollar.
- Powell emphasized that the policy stance remains restrictive and that rate decisions will be data-dependent. He refrained from signaling any urgency to cut rates, reinforcing the Fed’s cautious approach.
- The United States Q4 GDP growth slowed to 2.3%, missing the 2.6% forecast and falling from 3.1% in Q3. This lower-than-expected reading raised concerns about slowing economic momentum.
- The Personal Consumption Expenditure (PCE) price index rose to 2.3%, accelerating from 1.5% in the prior quarter, suggesting that inflation remains persistent despite the overall GDP slowdown.
- Core PCE, the Fed’s preferred inflation measure, remained unchanged at 2.2%, missing expectations for 2.5%. This softer-than-expected inflation reading fueled mixed reactions in the market.
- Initial Jobless Claims dropped to 207,000 for the most recent week, below estimates of 220,000 and down from the prior week’s 223,000 reading, signaling continued strength in the labor market.
- Continuing Jobless Claims declined to 1.858 million from 1.900 million, suggesting that job market conditions remain stable despite broader economic uncertainty.
DXY technical outlook: Dollar struggles to hold 108.00
The US Dollar Index attempted to recover above 108.00 but remains under pressure as traders reassess Fed policy signals. The Relative Strength Index (RSI) is still below 50, indicating weak bullish momentum, while the MACD’s red bars show ongoing bearish pressure.
The index risks further downside if it fails to hold 107.80, with potential support at 107.50. However, if sentiment shifts, resistance near 108.50 could cap gains before any meaningful rally.
GDP FAQs
A country’s Gross Domestic Product (GDP) measures the rate of growth of its economy over a given period of time, usually a quarter. The most reliable figures are those that compare GDP to the previous quarter e.g Q2 of 2023 vs Q1 of 2023, or to the same period in the previous year, e.g Q2 of 2023 vs Q2 of 2022. Annualized quarterly GDP figures extrapolate the growth rate of the quarter as if it were constant for the rest of the year. These can be misleading, however, if temporary shocks impact growth in one quarter but are unlikely to last all year – such as happened in the first quarter of 2020 at the outbreak of the covid pandemic, when growth plummeted.
A higher GDP result is generally positive for a nation’s currency as it reflects a growing economy, which is more likely to produce goods and services that can be exported, as well as attracting higher foreign investment. By the same token, when GDP falls it is usually negative for the currency. When an economy grows people tend to spend more, which leads to inflation. The country’s central bank then has to put up interest rates to combat the inflation with the side effect of attracting more capital inflows from global investors, thus helping the local currency appreciate.
When an economy grows and GDP is rising, people tend to spend more which leads to inflation. The country’s central bank then has to put up interest rates to combat the inflation. Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold versus placing the money in a cash deposit account. Therefore, a higher GDP growth rate is usually a bearish factor for Gold price.
