What’s up, forex friends? The U.S. is scheduled to print the advanced estimate for its Q3 GDP this Thursday (Oct. 29, 1:30 pm GMT). And if you’re planning to trade this event, make sure to keep these 3 things in mind.
1. The previous reading
GDP growth for Q2 2015 GDP was less than the expected +2.6%, but it still came in at a healthy +2.3%, which is a solid improvement over the previous quarter’s final reading of -0.2%. The details of the report showed that the main driver for growth was personal consumption expenditure or consumer spending, which increased by 2.9% (+1.8% previous). The positive trade balance due to exports (+5.3% v.s. -6.0% previous) increasing faster than imports (+3.5% v.s. +7.1% previous) contributed to the jump in the advanced GDP reading as well.
Overall, it painted a pretty picture of the U.S. economy, which reinforced the idea that a rate hike is still a possibility, and is also probably why forex traders reacted to the GDP reading by loading up on the Greenback for the most part despite already buying it up after the not-so-hawkish FOMC statement from the day before. To be fair, though, the U.S. Fed did imply that a rate hike was still in the cards – they just weren’t convinced that the economy is ready.
2. Expectations for the upcoming reading
The consensus among most economists and forex traders is that the advanced reading for Q3 2015 GDP would print a growth of 1.6%, which is less than half of the final Q2 GDP reading of +3.9%.
A slower growth rate is to be expected, I suppose. As I concluded in my latest Monthly Economic Review for the U.S., the available economic data points for the Q3 months aren’t really very impressive, with both consumer spending and industrial production currently in a downturn. Yesterday, we even saw the headline reading for September’s durable goods orders decline for the second consecutive month (-1.2% v.s. -1.1% expected, -2.3% previous) and the core reading wasn’t anything to write home about as well (-0.4% v.s. 0.0% expected, -0.2% previous).
3. The Greenback’s potential reaction
As I noted above, forex traders reacted to the Q2 GDP reading by loading up on the Greenback for the most part, as shown by the steady climb in the US dollar index. Buyer follow-through was weak, however, and the Greenback’s bullish momentum even lost steam later on. One possible explanation for this is that forex traders who bought up the Greenback as a reaction to the earlier FOMC statement and those who opened pre-emptive positions ahead of the GDP reading, as evidenced by the demand for the Greenback during the London forex session, were unwinding their positions by fading into the Greenback rally sparked by the event – you can even see the wicks on the charts due to such activities.
For the upcoming event, just keep in mind that a worse-than-expected reading would usually trigger a selloff as a knee-jerk reaction while a better-than-expected reading usually sparks a rally. These are usually short-term in nature, though, so don’t get too committed to them.
For longer-term moves, most forex traders take (1) the historical trends, (2) the actual contents of the report, and (3) the overall sentiment for the Greenback into consideration. And for now, the major factor that could affect demand (or lack of) for the Greenback is the upcoming FOMC statement, so make sure to keep an eye on that. And also note if the Greenback begins to show signs of weakness ahead of the actual event since that could potentially mean pre-emptive positioning by other forex traders, which could result in a similar scenario to last time.