If you think the FOMC statement is the only main event for the Greenback this week, think again! The U.S. economy is scheduled to print its advanced GDP reading for Q3, which might set off another round of fireworks in the forex charts.
Ready for our usual Forex Trading Guide routine? Let’s take a look at why this event is important, what happened last time, what’s expected this time, and how the dollar might react!
Why is this economic event important?
A country’s GDP or gross domestic product serves as a summary of how the economy fared during the reporting period. This is typically reported in percentage terms, comparing the previous year or quarter to the current one.
The U.S. economy releases three versions of its GDP: the advanced reading, the preliminary reading, and the final reading. As the first release, the advanced GDP figure tends to spark a strong reaction from dollar pairs, especially if the actual results come way below or way above expectations.
How did the previous releases turn out?
The advanced Q2 GDP release back in July turned out much stronger than expected at 4.0% versus the forecast at 3.1%. This marked an impressive rebound from the previous period’s 2.9% economic contraction.
It’s no surprise that the ongoing dollar rally back then gained more traction, as the strong GDP report added fuel to speculations that the Fed might be ready to hike interest rates early next year.
What’s expected for the upcoming release?For Q3 2014, the U.S. economy is expected to chalk up another decent growth figure of 3.1%, slightly slower compared to the previous quarter’s expansion. But hey, growth is still growth, right?
If that’s the case, Uncle Sam would stay on track to posting its best performance in nearly a decade, as the economy hasn’t seen consecutive quarters of strong growth since 2005. However, given the amount of concern the Fed has been showing regarding deflation and a potential global economic downturn, it would take a much stronger than expected GDP reading to convince policymakers that the recovery is gaining steam.
How might the U.S. dollar react?
As with most U.S. economic releases these days, the dollar tends to react strongly to fundamentals rather than risk sentiment. With that, a higher than expected GDP might trigger another round of dollar rallies while a weaker than expected report could lead to a sharper forex selloff.
Bear in mind that the upcoming FOMC decision could also put the GDP release in context, as a downbeat statement followed by a weak growth figure could keep the dollar weak for the rest of the year. Do you think this will be the case?