US GDP strengthens the dollar and improves market sentiment

The US economy is solid. This was confirmed by yesterday's GDP data. The QXNUMX revision surprised the markets. In addition, we got to know a better picture of the labor market. As a result, the dollar strengthened, which resulted in a significant decline EUR / USD exchange rate below 1,09. The yield on 2-year US bonds rose to 4,9 and today it briefly reached 4,95 percent. which means we are approaching the highs of early March this year.

New Fed projections

US bond prices did not like the strong upward revision of the GDP data for the first quarter of 2023. Yesterday, after the publication, they fell significantly, which meant a simultaneous increase in their yields. The markets are now assuming over 80 percent. probability of another interest rate hike by the Fed in July. September's move by another 25 basis points is priced at around 30%. Still not much considering the fact that the extra two moves this year have been confirmed by the dot chart and the new Fed projections. Powell's hawkish comments (in Sintra and Madrid) were added this week. The dollar is of course stronger, but the scale of appreciation is not overwhelming.

The US economy was expected to slow sharply this year due to higher interest rates. However, updated data shows that in the first quarter it grew at a solid 2 percent rate. Gross domestic product was revised upwards from the previously reported growth rate of 1,3%. The U.S. economy is also expected to grow between 1% and 2% in the second quarter ending today. to 4,2 percent, based on the latest Wall Street forecasts. GDP growth in the first quarter is largely due to strong consumer spending. They were revised up to 3,8%. from XNUMX percent on an annualized basis, which explains most of the GDP growth. Exports were also slightly stronger than previously reported.

Will the market soon forget?

The strong move in the FX and debt market around 14:30 is also an effect of the low jobless claims reading, which amounted to 239k. and confirmed that the labor market is doing well.

Both publications indicate that the Fed "there is still much to do” and fit in with the last words of the bank's chairman.

Stock indices mostly closed Thursday's session "above the line", only Nasdaq Composite achieved a "flat" score. The better data shows that it is good and so far investors are not worried that it means a better chance of continuation of the restrictive policy of the Federal Reserve, which at some point will leave its mark on the economy. Let us remember, however, that yesterday's data (GDP) is history and describes the state for the period from January to March.

Tomorrow we will be in the third quarter and at the same time in the second half of the year. If the next, more recent publications are negative, then the market will quickly forget about the positive revision of economic growth.

Source: Łukasz Zembik, OANDA TMS Brokers