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Heads up, forex friends!

The U.S. will be releasing the second estimate for its Q4 2015 GDP this Friday (February 26, 1:30 pm GMT) and might not look too good for Uncle Sam so y’all better read up.

Why is the GDP report important?

The gross domestic product or GDP offers the most comprehensive snapshot of economic performance within the country, which is why is very important to both decision-makers and forex traders alike.

The Bureau of Economic Analysis (BEA) actually releases three GDP estimates: the advanced reading, the preliminary reading, and then the final reading.

The advanced reading is the least accurate since it’s the earliest estimate, but it generally triggers the biggest reaction since it’s the first GDP release on the lineup.

The preliminary or second estimate then builds upon the advanced reading, as revised or more complete data come in. As for the final reading, well, it’s exactly what it says on the tin – it’s the third and complete estimate.

How did the advanced reading fare?

It was pretty bad, to be frank about it. According to the BEA, the U.S. Q4 2015 GDP only expanded by 0.7% quarter-on-quarter, which is slightly below the expected 0.8% increase, but it is significantly lower than the previous quarter’s 2.0% growth.

On a year-on-year basis, this translates to a 1.8% expansion, which is a bit slower than the 2.1% growth registered during the previous quarter.

In terms of trends, both the quarter-on-quarter and year-on-year readings showed that U.S. GDP growth has been slowing down, as can be seen on the charts below.

Forex Snapshot: U.S. GDP q/q

Forex Snapshot: U.S. GDP q/q

Looking at the details of the report, consumer spending or personal consumption expenditure was still the backbone of the U.S. economy, increasing by 2.2 and adding around 1.46% to quarterly U.S. GDP growth.

However, this is lower than the 3.0% increase and 2.04% contribution to GDP growth that was reported during the previous quarter, so the deceleration in consumer spending was actually one of the reasons why Q4 2015 GDP slowed down.

Another reason for the slowdown was the 2.5% contraction in private investment (-0.7% previous), which subtracted 0.41% from GDP growth (-0.11% previous).

Trade was also a bigger drag, subtracting 0.47% from GDP growth (-0.26% previous) due mainly to a 2.5% contraction in exports (+0.7% previous).

What’s expected for the upcoming estimate?

For the upcoming preliminary reading, forex traders are bracing themselves for an even slower pace of growth at only 0.4%.

Normally, the preliminary reading doesn’t usually generate as much interest from forex traders as the advanced or final estimate, as can be seen on the chart during the Q3 2015 preliminary estimate below.

USD Index: 1-hour Forex Chart
USD Index: 1-hour Forex Chart

However, there is a good chance that more forex traders may have their sights on this report, especially if the actual reading is worse than expected.

This would mean that the U.S. Fed hiked rates while the U.S. economy was still slowing down, which is not exactly the ideal situation to hike rates since rate hikes are meant to stop economies from overheating.

With that, a slower-than-expected GDP reading might cause forex traders, especially the interest rate junkies, to doubt further rate hikes down the road, which may mean more weakness for the Greenback.

Fed Head Janet Yellen did say during her February 10 testimony that “GDP growth really clearly slowed a lot in the fourth quarter” so perhaps forex traders may have priced in an even slower growth already.

In that case, the upcoming preliminary GDP release may turn out to be a non-event, but it’s always good to be prepared for a possible trading opportunity.