Commerzbank’s Michael Pfister highlights that robust US Gross Domestic Product (GDP) growth of 3.4% annualised in Q3 reinforces the case for a stronger Dollar versus other G10 currencies. Faster US growth gives the Federal Reserve (Fed) more scope to address inflation risks with rate hikes, a key driver of USD outperformance in 2022/23. He stresses that FX markets should keep focusing on private consumption trends as the main growth engine.

US growth keeps Dollar supported

“Yesterday’s US growth figures for the third quarter were a pleasant surprise: rather than the expected 3.2% annualised quarter-on-quarter growth, the figure reported came in at 3.4%. Given everything that has happened this year, it is easy to forget that there has been a strong case for a stronger dollar in recent years: The US economy is growing significantly faster than those of all the other G10 countries.”

“However, this should also give the Fed considerably more scope to respond to inflationary risks with interest rate hikes. In 2022/23, this was one of the main reasons for the USD’s outperformance.”

“FX markets should nevertheless bear in mind the stronger US growth. Given such figures, the market is likely to find it much easier to believe hawkish comments from Fed officials and price in interest rate hikes than it is with weaker growth in other G10 countries.”

“Secondly, the breakdown of growth indicates when the whole picture might shift: the outperformance continues to be driven almost entirely by private consumption, even though IT investment has recently helped the other components catch up. Amidst all the justified attention being paid to the tech sector, market participants should therefore continue to look out for signs that private consumption might be waning.”