GDP Quick Analysis: USD may fall as underlying weakness justifies dovish Fed rate cut

The US economy is showing more signs of weakness – and this is set to catch up with the Federal Reserve and the US Dollar. 

US Gross Domestic Product has grown by 1.9% annualized in the third quarter, better than 1.6% expected but below 2% seen in the second quarter. However, the marginal slowdown marks an ongoing divergence in the economy. 

While personal consumption is up by 2.9% annualized, above 2.6% predicted, business investment continues contracting. It has shrunk by no less than 3% annualized in Q3, the worst in over three years. This comes on top of a 1% annualized drop in the second quarter. 

Earlier, ADP, America's largest provider of payrolls for the private-sector, marginally beat expectations with an increase of 125,000 in October, 5,000 above expectations. However, it came on top of a substantial downward revision to September's numbers – 93,000 against 135,000 initially reported. 

Fed and Dollar reaction

What is the central bank's take from the figures?

- GDP: Weak investment means slower growth in the medium term, which the central bank targets.

- ADP: Employment has been solid, while inflation was the weak part of the Fed's dual mandate. But the labor market is weakening as well.

The Federal Reserve announces its rate decision in a matter of hours – at 18:00 GMT. Bond markets expect a rate cut – the third consecutive move in three months. However, markets expect the Fed to hint that it will pause after the latest moves – making it a hawkish cut.

The fresh figures from the US economy seem to cement the rate cut. Jerome Powell, Chairman of the Federal Reserve, will have a hard time reiterating that this third slash does not reflect serious concern about the economy. 

Will he open the door to another move in December? The Fed never fully commits so much time in advance, but the chances of a positive or hawkish twist are diminishing. Powell is more likely to say he will "act as appropriate" and will rule on rates on a "decision by decision basis." 

If the Federal Reserve shows less confidence about the future and keeps markets optimistic for a December cut – the US dollar may reverse its minimal post-GDP gains and tumble down. 

See 

• FOMC Preview: Three and done
• Fed Cheat Sheet: Three scenarios for EUR/USD price action as uncertainty is higher than usual

Softer language may weigh on the US dollar.