US Q2 GDP Preview: Economic growth set to pick up momentum

• The United States Gross Domestic Product is seen expanding at an annualized rate of 2% in Q2.
• The current resilience of the US economy bolsters the case for a soft landing.
• Markets expect the US Federal Reserve to start its easing cycle in September.

The US Bureau of Economic Analysis (BEA) will publish the first estimate of the US Gross Domestic Product (GDP) for the April-June period on Thursday. The report is expected to show an economic expansion at an annual rate of 2%, following the 1.4% growth recorded in the prior quarter.

Forecasting US Gross Domestic Product: Deciphering the numbers

Thursday's economic agenda in the US features the unveiling of the initial GDP report for the second quarter, set to be disclosed at 12:30 GMT. Analysts anticipate that the first assessment will reveal a 2% growth rate for the world's largest economy in the April-June period, a moderately robust pace, especially when compared to the 1.4% expansion recorded in the preceding quarter. 

According to the Federal Reserve (Fed) Bank of Atlanta’s latest GDPNow estimate published on July 17, the US economy grew at an annual rate of 2.7% in the second quarter. “The nowcasts of second-quarter real personal consumption expenditures growth and second-quarter real gross private domestic investment growth increased from 2.1% and 7.7%, respectively, to 2.2% and 8.9%,” notes the Atlanta Fed in its press release, explaining the impact of June Housing Starts and Industrial Production data on GDP.

When speaking at the post-meeting press conference following the May policy meeting, Fed Chairman Jerome Powell noted that the GDP growth has slowed noticeably from the 3.4% expansion seen in the last quarter of 2023, but he said that a key component of the GDP, private domestic purchases, was up 3.1%. This component is essentially seen as a good indicator of private-sector demand because it excludes exports and government purchases. 

Market participants will also pay close attention to the GDP Price Index, which represents the changes in the prices of goods and services produced in the US, including those exported to other countries, while excluding prices of imports. Basically, the GDP Price Index shows the impact of inflation on the GDP. In the second quarter, the GDP Price Index is forecast to rise 2.6%, down from the 3.1% increase in the first quarter. 

Finally, the GDP report will also include the quarterly Personal Consumption Expenditures (PCE) Price Index and core PCE Price Index data. These numbers will reveal whether the core PCE Price Index, the Fed’s preferred gauge of inflation, rose 0.1% on a monthly basis as expected.

Previewing the GDP data, “The Q2 GDP report released on Thursday will offer an early look at how strong the June consumer spending data is likely to have been,” said TD Securities analysts in a weekly report and added: “Based on our bottom-up expectations, we look for GDP growth to have strengthened to 2.3% q/q AR, up from 1.4% in the first quarter, with consumer spending and inventories likely acting as major catalysts.”

When will the GDP print be released, and how can it affect the USD?

The US GDP report will be published at 12:30 GMT on Thursday. In addition to the headline real GDP print, the change in private domestic purchases, GDP Price Index and the Q2 PCE Price Index figures could influence the US Dollar’s (USD) valuation.
 
Softer inflation readings for May and June, combined with growing signs of a cooldown in the US labor market, fueled into expectations for a Fed rate cut in September. According to the CME FedWatch Tool, a 25 basis points (bps) rate reduction in September is fully priced in. Moreover, markets see a nearly 50% chance that the Fed will opt for a second 25 bps cut in December, bringing the policy rate down to 4.75%-5% range by the end of the year.

The Q2 GDP report by itself is unlikely to change investors’ mind regarding the September policy move. A stronger-than-forecast GDP growth, especially if accompanied by a healthy increase in private domestic purchases, however, could cause investors to refrain from pricing in a second cut in December. In this scenario, the USD is likely to gather strength against its rivals as the immediate reaction.

On the other hand, a disappointing GDP print and a noticeable decline in the quarterly core PCE inflation could keep market participants’ optimism about additional Fed easing. In this case, risk flows are likely to dominate the action and make it difficult for the USD to find demand.

Eren Sengezer, European Session Lead Analyst at FXStreet, shares a brief technical outlook for the USD Index (DXY):

“The 200-day Simple Moving Average aligns as a key pivot level for the DXY at 104.30. In case the index confirms that level as support, it could face strong resistance at 104.80-105.00, where the 100-day, 50-day and the 20-day SMAs converge, before targeting 105.50 (static level). On the downside, static support seems to have formed at 103.70 ahead of 103.00 (psychological level, static level) and 102.35 (March 8 low), in case the 200-day SMA turns into resistance.”