Economic data signals slower growth in the US economy, yet inflation pressures remain unexpectedly high.

US Dollar News

The US dollar showed a mixed performance following the quarterly GDP and PCE reports released during the New York session on Thursday (April 25). USD/JPY edged up to the 155.50s, shrugging off the risk of Japanese intervention. Meanwhile, the daily candles of EUR/USD and GBP/USD remained in the green, with only slight corrections. The US Dollar Index (DXY) continued to consolidate around 105.70.

The US Bureau of Economic Analysis reported the initial Gross Domestic Product (GDP) estimate for the first quarter of 2024 last night. The data indicates slower growth in the US economy, yet inflation pressures remain higher than expected.

Quarterly GDP growth was recorded at +1.6%, significantly lower than the consensus estimate (2.5%) and the previous period's growth (+3.4%). The Personal Consumption Expenditures (PCE) Price Index increased by +3.7% quarterly, surpassing the consensus estimate of +3.4%.

The weakening of US GDP is likely to put pressure on the greenback. However, persistent inflation may prompt the Fed to postpone its interest rate cut plans — potentially supporting the US dollar exchange rate.

"The Fed will probably be more concerned with the PCE numbers, which have provided yet another hot set of inflation readings and suggest the battle to return CPI to target is still far from being won," said Stuart Cole, chief macro economist, at Equiti Capital in London, "The inflation figures...potentially even point to the need for a further tightening. We know that returning CPI (consumer price inflation) to target is the Fed's main objective and therefore, on balance, today's figure probably push an interest rate cut further down the road."

FedWatch CME shows a slight shift in market speculation about the timing of the Fed's interest rate cut. The probability of a rate cut starting in September has decreased from 70% to 56.7%. Conversely, there has been an increase in the probability of a rate cut starting in November, up to 70%.

Market participants will closely watch the release of the monthly PCE report tomorrow for more up-to-date data on US inflation pressures. The report includes the Core PCE Price Index, one of the Federal Reserve's key inflation gauges.

The interim consensus expects the Core PCE Price Index to increase by 0.3% (m/m) in March 2024, while its annual growth rate slows from 2.8% to 2.6%. If the actual figures exceed expectations, the US dollar may rally again. Conversely, weaker data could weigh on the US dollar.