The US Dollar is feeling a bit of a chill following a softer-than-expected GDP report from the US. Interestingly, the inflation component within this GDP release hasn’t shown much movement. The US Dollar Index (DXY) is currently hovering below 108.00, trying to find its footing.
In particular, the DXY—which measures the dollar’s value against a basket of six key currencies—is seeing some softness in reaction to the fourth-quarter GDP data. The European Central Bank (ECB), on the other hand, did what economists were expecting by trimming its policy rate by 25 basis points. With the Federal Reserve (Fed) taking a hawkish pause, the markets are curious to see if the ECB will comment on the US’s political shifts, especially with Donald Trump making headlines again.
Fed Chairman Jerome Powell, however, chose to steer clear of commenting on President Trump. Many traders interpreted the Fed’s latest position as a subtle message to the current administration, indicating that their decisions remain rooted in data analysis rather than political influence.
Daily Digest: Market Movers
This week, Asian markets are expected to remain subdued due to the Lunar New Year celebrations, which kicked off on Tuesday. Chinese traders are scheduled to make their return on February 5. Meanwhile, the ECB has indeed lowered its policy rate by 25 basis points, aligning with predictions. The US GDP for the fourth quarter didn’t quite hit the mark, with:
- Headline GDP falling to 2.3%, missing the 2.6% expectation and dropping from the previous quarter’s 3.1%.
- The Personal Consumption Expenditure (PCE) Index rose to 2.3%, up from 1.5%.
- Core PCE held steady at 2.2%, falling short of the anticipated 2.5%.
Additionally, US jobless claims for the week ending July 24 fell to 207,000, which was lower than the expected 220,000, down from the previous week’s 223,000. Continuing claims were reported at 1.858 million, a slight decrease from 1.900 million.
Later today, at 13:45 GMT, ECB Chairman Christine Lagarde is set to give her monetary policy speech, followed by a Q&A session. Equities are maintaining a positive trajectory, with both European and US indices starting Thursday on a high note. The CME FedWatch tool currently indicates an 80% probability that the Fed will hold steady on interest rates at their upcoming March 19 meeting. Meanwhile, the US 10-year yield is trading near 4.502%, having hit a fresh yearly low of 4.484%.
US Dollar Index Technical Analysis
The US Dollar Index (DXY) seems to be in a holding pattern while US yields are inching downward. Market participants are particularly concerned about the pressure from President Trump on the Fed to cut rates and borrowing costs. In light of the Fed’s recent decision, tensions could escalate if the President resorts to unconventional methods to sway the Fed’s policy, potentially impacting its credibility.
Right now, the DXY is struggling to reclaim the psychological 108.00 threshold on a daily basis. Should it surpass this level, the next target would be 109.30—marked by the July 14, 2022, high and a rising trendline. Beyond that, an advance to 110.79, the high recorded on September 7, 2022, is in sight.
On the downside, support is offered by the 55-day Simple Moving Average (SMA) at 107.64 and the October 3, 2023, high at 107.35. These levels should provide some defense for the DXY, though the Relative Strength Index (RSI) indicates potential for further decline. Therefore, dollar bulls might look to 106.52 or even 105.89 for stronger support levels to instigate a rebound.
US Dollar Index: Daily Chart
GDP FAQs
Gross Domestic Product, or GDP, measures the economic growth rate of a nation over a specified period, often quarterly. The most accurate figures compare GDP to the previous quarter, for example, Q2 2023 versus Q1 2023, or to the same period the previous year, like Q2 2023 versus Q2 2022. Annualized GDP figures take the quarterly growth rate and project it as if it were constant throughout the year, which can be misleading if short-term disruptions occur that won’t last the entire year—like the economic drop at the start of the COVID-19 pandemic in early 2020.
Generally, a higher GDP signals a robust economy, which can bolster the country’s currency due to increased production of goods and services that attract foreign investment. Conversely, when GDP declines, it’s usually a negative sign for the currency. Economic growth typically spurs spending, which can lead to inflation, prompting the nation’s central bank to raise interest rates. This can draw in global investors, supporting the currency’s appreciation.
In times of economic growth and rising GDP, increased spending can push inflation up, leading central banks to hike interest rates to keep inflation in check. Higher interest rates often deter gold investment compared to the potential return on deposit accounts, making robust GDP growth a potentially bearish signal for gold prices.
