Dollar Rallies on Stronger-Than-Expected U.S. GDP Report

The dollar index (DXY00) edged to a new 5-week low but then recovered and was up by +0.81% late Thursday.  The dollar index saw support from the stronger-than-expected U.S. GDP report and some short-covering after five consecutive sessions of losses.

Thursday’s U.S. Q3 GDP report of +2.6% (q/q annualized) was a bit stronger than the consensus of +2.4%. The GDP report eased recession concerns a bit.  U.S. GDP in Q3 snapped the 2-quarter string of losses in Q1 (-1.6%) and Q2 (-0.6%), which was defined by one measure as a technical recession in the first half of 2022. The NBER isn’t likely to weigh in with its official recession dating until sometime next year.

Looking ahead, the consensus is for U.S. GDP in Q4 to show weak growth of +0.6% (q/q annualized) and then fall by -0.1% in Q1-2023.  On a calendar year basis, the consensus is for GDP growth to ease to +0.4% in 2023 from +1.7% in 2022 and the strong pandemic-recovery rate of +5.9% in 2021.

EUR/USD (^EURUSD) Thursday fell -1.10%.  The euro saw weakness on a dovish response to Thursday’s ECB meeting outcome.  The 10-year bund yield on Thursday fell sharply by -15 bp to 1.96%, undercutting the euro’s interest rate differentials.

The markets interpreted the outcome of Thursday’s ECB meeting as a “dovish tighten.”  The European Central Bank (ECB) raised its key interest rates sharply by +75 bp, but seemed to back off its guidance for further sharp rate hikes.  The ECB said in its post-meeting statement that it “expects to raise interest rates further.”  However, there was no mention of expectations for further sharp rate hikes.  ECB President Lagarde said that the ECB might well still hike at several more meetings, which at least suggested an ending date for the ECB’s rate-hike regime.

December gold (GCZ2) on Thursday closed -3.60 (-0.22%), and December silver (SIZ22) closed up +0.04%.  Precious metals prices Thursday were undercut by the rally in the dollar, but saw support from lower bond yields.  Silver and industrial metals saw support from the stronger-than-expected U.S. GDP report. Gold has been undercut by fund liquidation as long positions in gold ETF’s dropped to a 2-1/2 year low Tuesday, although that long position recovered slightly on Wednesday.

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