US: Weaker real GDP growth to keep USD weaker - MUFG

Derek Halpenny, European Head of GMR at MUFG, notes that in a week when we have had an FOMC statement that only included minor alterations, the dollar remains under downward pressure – the DXY index today has fallen to the lowest level since August of last year.

Key Quotes

“The failure of the FOMC to provide an assessment of risks in any way, leaves a June rate increase as more unlikely now. Of course, yesterday’s GDP report will only reinforce that view. The drop in real GDP growth to just 0.5% in Q1 will no doubt raise concerns, especially with business equipment investment down a notable 8.6% - the worst decline since Q2 2009 as the economy was emerging from the GFC-induced recession.

The impact of that drop was reinforced by a 2.6% Q/Q drop in exports. The export performance over the last three quarters (+0.7%, -2.0% and -2.6%) is also the worst since the GFC-induced recession. There have now also been three consecutive quarters of inventory destocking which has weighed on overall real GDP growth. Indeed, the deceleration of real GDP in Q1 was the third consecutive quarter of slowdown.

Of course the main story behind the overall real GDP slowdown has been the slowdown in real consumer spending and since Q2 2015 when consumer spending growth was 3.6%, there have been three consecutive slowdowns there as well to 3.0%, then 2.4% and 1.9% in yesterday’s Q1 report. But this should not be viewed alarmingly – the average Q/Q growth rate for consumer spending still stands at 2.9% since crude oil prices began falling in mid-2014.

The good news therefore is that strong employment and rising real incomes (real disposable income jumped 2.8% Q/Q annualised in Q1 and the savings rate increased to 5.2%) points to the potential for consumer spending to recover, helping to lift overall real GDP growth. Three consecutive quarters of slowing real GDP growth is not uncommon during this post-GFC expansion phase – this is the fourth time. With crude oil-related investment in structures a factor again and with crude oil prices rising and with the US dollar notably weaker now, there is certainly the potential for some recovery in activity going forward.

If that was to transpire, then the more telling information from yesterday’s GDP data will have been the jump in the core PCE inflation rate to 2.1% - the highest level since Q1 2012. Very quickly, on the back of some better economic data, concerns could begin to rise about underlying inflation pressures. That won’t perhaps happen imminently and a June rate increase does look less likely now, but the two DOTS assumed by the Fed for this year may yet materialise just at a later date than most had assumed. That suggests the current under-performance of the dollar is unlikely to turn into a sustained trend.”

Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers. The author will not be held responsible for information that is found at the end of links posted on this page.

If not otherwise explicitly mentioned in the body of the article, at the time of writing, the author has no position in any stock mentioned in this article and no business relationship with any company mentioned. The author has not received compensation for writing this article, other than from FXStreet.

FXStreet and the author do not provide personalized recommendations. The author makes no representations as to the accuracy, completeness, or suitability of this information. FXStreet and the author will not be liable for any errors, omissions or any losses, injuries or damages arising from this information and its display or use. Errors and omissions excepted.

The author and FXStreet are not registered investment advisors and nothing in this article is intended to be investment advice.

Feed news

Latest Forex News

Latest Forex News

Editors’ Picks

EUR/USD retreats below 1.1300 area as NFP-inspired dollar weakness fades

EUR/USD jumped to a daily high of 1.1333 with the initial market reaction to the disappointing November Nonfarm Payrolls data but quickly returned below 1.1300. Rising US Treasury bond yields seem to be helping the dollar stay resilient against its major rivals. 


GBP/USDdrops to 1.3250 area as dollar regains strength

GBP/USD spiked above 1.3300 in the early American session with the initial market reaction to the gloomy US November jobs report. However, the greenback regathered strength on hawkish Fed commentary and forced the pair to turn south.


Gold struggles to capitalize on weak NFP data, holds near $1,770

Gold spiked to a daily high near $1,780 with the initial market reaction to the disappointing Nonfarm Payrolls data from the US but seems to be having a difficult time preserving its bullish momentum with the 10-year US T-bond yield staying resilient.

Gold News

The bull and the bear case for BTC

Bitcoin price saw a bullish impulse that faced massive headwinds before it tagged a crucial psychological barrier. Bitcoin is likely to experience massive volatility as the situation resolves over time. 

Read more

Cyber Monday 2021 Discounts!

Glued to your trading screen on Cyber Monday? Upgrade your skills by signing up for FXStreet’s Premium service, offered at a discount of up to 50%. Fellow traders have already taken advantage of Black Friday profits. What about you? 

Subscribe now!