US Dollar: Rate hike pricing finds support in stronger growth – Commerzbank

US Gross Domestic Product (GDP) expanded at an annualised rate of 3.4% in Q3, strengthening the argument for a firmer Dollar against other G10 currencies, according to Commerzbank’s Michael Pfister. With the US economy growing faster, the Federal Reserve (Fed) has greater room to counter inflation risks through rate hikes, an important factor behind USD outperformance in 2022/23. Pfister emphasises that private consumption remains the principal engine of growth and should stay central to FX markets’ attention.

Dollar draws support from US growth

"Yesterday’s US growth figures for the third quarter were a pleasant surprise: rather than the expected 3.2% annualised quarter-on-quarter growth, the figure reported came in at 3.4%. Given everything that has happened this year, it is easy to forget that there has been a strong case for a stronger dollar in recent years: The US economy is growing significantly faster than those of all the other G10 countries."

"However, this should also give the Fed considerably more scope to respond to inflationary risks with interest rate hikes. In 2022/23, this was one of the main reasons for the USD’s outperformance."

"FX markets should nevertheless bear in mind the stronger US growth. Given such figures, the market is likely to find it much easier to believe hawkish comments from Fed officials and price in interest rate hikes than it is with weaker growth in other G10 countries."

"Secondly, the breakdown of growth indicates when the whole picture might shift: the outperformance continues to be driven almost entirely by private consumption, even though IT investment has recently helped the other components catch up. Amidst all the justified attention being paid to the tech sector, market participants should therefore continue to look out for signs that private consumption might be waning."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)