US Q2 GDP Preview: Strong figures could help US Dollar in a “data-dependent” world

• The Q2 GDP is the first top-tier US economic report released after the FOMC meeting.
• With the Fed likely indicating it will remain "data-dependent," growth and inflation numbers from the GDP report could be critical.
• US Dollar Index could receive additional support from positive data.

The US Bureau of Economic Analysis (BEA) is scheduled to release its first estimate of the second-quarter Gross Domestic Product (GDP) on Thursday, July 27th at 12:30 GMT. According to market forecasts, the US economy is expected to expand at an annualized rate of 1.8% in Q2, following the 2% growth rate recorded in the first quarter.

This release will be the first major economic report following the Federal Reserve meeting, and the central bank is expected to continue its 'data-dependent' approach to monetary policy. As a result, the Q2 GDP figures will be closely watched by investors and analysts. It's worth noting that the first release of Q2 GDP typically has a greater potential to influence the markets than subsequent revisions.

US GDP: What else to look for in the Q2 preliminary report 

In addition to the overall growth rate of close to 2.0% in the second quarter, the BEA report will include other figures that will be observed carefully. One of these figures is the Core Personal Consumption Expenditures (PCE) Index, a key inflation measure used by the Federal Reserve. According to market consensus, the Core PCE Index is expected to decline to 4% in Q2 from 4.9% in Q1, which would be the lowest level since the first quarter of 2021. Another inflation indicator that will be scrutinized is the GDP Price Deflator, also known as the GDP Product Price Index. This is expected to decline to 3% in Q2 from 4.1% in Q1, marking its lowest level since the fourth quarter of 2020.

At the same time (12:30 GMT), the US Durable Goods Orders and the weekly Jobless Claims reports are also due to be released. A few minutes later, European Central Bank (ECB) President Christine Lagarde is scheduled to deliver her post-meeting press conference. With the markets still digesting the outcome of the FOMC meeting held on Wednesday, volatility is likely to prevail. 

How could the GDP release affect the US Dollar 

The International Monetary Fund (IMF) has raised its US GDP growth estimate for 2023 from 1.6% in April to 1.8%, and its global growth estimate from 2.8% to 3.0%. However, the IMF has warned that global growth risks remain tilted to the downside. US growth expectations are higher than most European countries, struggling to avoid a recession. The growth divergence between the US and Europe could limit the decline of the US Dollar or the rally of EUR/USD. If the difference narrows, the situation could change.

If the Q2 GDP report shows higher-than-expected growth figures combined with hotter inflation numbers, the US Dollar could be poised for a significant rally against other currencies. Such a scenario would make markets consider it more likely that the Federal Reserve will raise interest rates again, and it would also demonstrate that the US economy remains strong and resilient despite monetary policy tightening.

A number in line with expectations, with an annualized growth rate of around 2%, and decreases in inflation indicators – such as the Core PCE Index from 4.9% to 4% or the GDP Price Deflator from 4.1% to 3%– have the potential to weigh on the US Dollar by pushing down US Treasury yields. Such figures would support the scenario of no further rate hikes from the Fed.

The worst scenario for the US economy – higher inflation and lower growth –  is not necessarily the worst scenario for the US Dollar. The most negative potential outcome for the Greenback would be a negative surprise in growth numbers and inflation slowing down more than expected. Fears of a recession, combined with inflation falling toward the target too quickly, would likely trigger expectations of rate cuts, probably in the fourth quarter or the first quarter of next year.