US economic growth is expected to have slowed a little in the final quarter of 2017, but to still remain in healthy territory. However, according to Fed models, there is the prospect for a slightly better reading than what is anticipated. With the implied probability for a Fed hike in March resting at 73%, a positive surprise in GDP could seal the deal for such an action, and perhaps help the dollar to regain some poise.
The first estimate of US GDP for the fourth quarter will be released on Friday at 1330 GMT, and expectations are for economic growth to have slowed to 3.0% on an annualized basis, from 3.2% in the previous quarter. Besides growth figures, this data set will also contain numbers on consumer prices for the quarter, though in this regard, investors may pay more attention to the core PCE price index for December that will be released on Monday.
What do gauges of the economy suggest? The Atlanta Fed GDPNow model currently anticipates Q4 growth at 3.4%, while the New York Fed’s Nowcast model forecasts a print of 3.9%. Therefore, the risks surrounding the official forecast of 3.0% may be tilted to the upside, perhaps for a slightly stronger-than-anticipated GDP print.
Even though the Fed is widely expected to stand pat at its upcoming policy meeting next week, the same cannot be said for the March gathering. At the time of writing, the implied probability for a rate hike in March stands at 73% according to the Fed funds futures, and a positive surprise in the GDP data could push that percentage even higher. Strengthening expectations could help the dollar to claw back some of its recent losses, at least on the news. Dollar/yen could spike up and target the 109.80 barrier, where an upside break could set the stage for extensions towards the next resistance threshold at 110.20.
On the flipside, in case these data disappoint relative to expectations, the dollar could come under renewed selling interest. Dollar/yen could fall below its recent lows of 109.40, potentially targeting the 108.70 support area. If the bears prove strong enough to overcome that hurdle, the next level that could come into play is the round figure of 108.00.
Finally, it should be noted that the US will also publish durable goods orders for December at the same time as the GDP figures, implying that any market reaction in the dollar at the release may be influenced by those prints too, especially in case of a notable surprise.
