- There is room for an upside surprise in GDP figures, similar to most pandemic-era releases.
- Inflation components are set to remind investors of the Fed's aggressive rate rise path.
- The publication may unleash further dollar strength, extending the trend.
Has US growth peaked? That is what economists are expecting first-quarter Gross Domestic Product figures to show – a marked slowdown from 6.9% annualized expansion to a mere 1%. Rising energy prices have eroded consumers' willingness to spend, and rising wages are insufficient to keep the momentum, as these are chasing rising wages.
Slower growth means a weaker dollar, but there are three reasons to expect a positive outcome for the greenback.
The world's No. 1 economy is still growing at a rapid clip, as figures from early 2022 have shown. Fast job growth is incompatible with a snail pace growth. Even if the reasons mentioned above are enough for a significant deceleration, perhaps the gloom has gone too far.
Looking at data since the pandemic broke out just over two years ago, there was a clear tendency to underestimate America's ability to bounce back. Growth figures beat expectations five out of eight times, and were spot on three times, missing only once. That single below-consensus figure was seen in the last quarter of 2021 – the latest release – and came out at 6.9% vs. 7%, not a shocker.
Overall, experience shows that economists were too bearish on growth prospects in recent years. If that repeats itself, the dollar could gain ground in response.
Something which may impact the Fed more than headline figure is the deflator. This is a measure of how price rises erode the growth in nominal terms.
The consensus stands at 7.2% annualized price rises, up from 7.1% in the fourth quarter. Even if this is a relative deceleration, a level above 7% still implies high inflation. In turn, this publication serves as a reminder for investors that the Federal Reserve is set to raise interest rates at a rapid pace.
GDP data is due out less than a week before the Fed meets – and while the central bank is in its blackout period, staying silent. Even if the data does not impact officials, markets will not know that. Uncertainty could further push funds into the safe-haven dollar.
The dollar is already benefiting from worries about the Fed, China's zero covid policy and Russia's ongoing war in Ukraine – now with bans on gas imports to some countries. However, markets may take a step back in rushing toward the greenback ahead of the GDP releae, a major one.
The mere release of the figure could unleash further strength, basically resuming the broader trend. Such a phenomenon happens with significant events, that cause a pre-publicaiton freeze and furious action afterward.
A refocus on the US economy and the Fed could remind investors that the US dollar has room to rise with or without its role as a safe-haven currency.