US Q3 GDP report is the main test for the USD rally – MUFG

Lee Hardman, Currency Analyst at MUFG, suggests that the US dollar’s renewed upward momentum has caught market participants by surprise especially in the run up the US election which has the potential to materially weaken the US dollar if Donald Trump becomes President.

Key Quotes

“However, with Donald Trump falling well behind in the polls it has allowed market participants to almost write off the possibility of him becoming President.

Market participants were also becoming increasingly confident that the structural US dollar bull run had already peaked. Long US dollar positions have been lightened. The latest IMM report revealed that long speculative US dollar positions still remain less than half levels which were in place during last year. It leaves scope for long US dollar positions to be built up further reinforcing upward momentum in the near-term.

The main fundamental test for the US dollar rally in the week ahead will be the release of the first estimate of the US GDP report for Q3. The report could prove a market moving event for the US dollar. The Fed‘s plan to resume rate hikes in December is dependent on incoming economic data coming in line with their expectations. The Fed is expecting stronger economic growth in the second half of this year after weak annualized growth of just 1.1% in the first half of the year.

We believe that above trend growth of around 2% should prove sufficient for the Fed to follow through with plans to resume rate hikes in December. The consensus expectation amongst US economists if for even stronger growth of 2.5% in Q3 which would provide a green light for further US dollar gains. However, expectations for growth have been sliding recently as the US data flow has disappointed. If US GDP surprises to the downside coming in closer to the weaker growth recorded in the first half of the year it could provide at least a temporary set-back for the US dollar.”