GDP Beats Expectations Leading to a More Likely Hike in Interest Rates

USD

As expected, the U.S. dollar was mostly flat overnight as market participants looked ahead to today’s economic docket.  Yesterday’s data revealed positive signs for the U.S. economy with Durable goods orders coming in net positive and jobless claims remaining near the best average in over 40 years.  However, those prints were not enough to change the outlook on interest rates.

Today’s data, however, should solidify bets that the Federal Reserve will raise interest rates by the end of the year.  The U.S. economy expanded 2.9% in the third quarter of the year, beating expectations of a 2.6% reading.  The increase represents the largest expansion in two years. The stellar growth follows a disappointing 1.4% expansion in the second quarter.  The report was not all roses, however. Personal consumption rose only 2.1%, missing expectations of 2.6%.  Nevertheless, the data should strengthen the Fed’s view that the economy is making slow and steady progress.   Indeed, in the minutes following the GDP release odds that the Fed will increase rates by the end of the year jumped to 76% from 72% yesterday.

The U.S. dollar has gained modestly after the positive print.  The University of Michigan consumer sentiment report is due out at 10 a.m. but will take a backseat to the growth numbers.

GBP

The British pound continued its retreat yesterday and overnight.  The beleaguered currency was unable to take advantage of a report released yesterday that showed the British economy expanded more than economists expected.  The country’s gross domestic product expanded 0.5% in the third quarter, after the Brexit vote.  The sterling’s negative reaction to positive data shows that the currency may not have yet carved out a bottom and more losses are possible.  The main worry remains political, with uncertainty surrounding how the U.K. will exit the European Union.  From our view, it is very likely that British businesses will be faced with a less skilled workforce as the free movement of EU citizens into the British marketplace will be limited.

CAD

The Canadian dollar has pushed to fresh multi-month lows against the U.S. dollar this morning after strong U.S. GDP highlights monetary policy divergence.  The “loonie” touched its weakest level since March yesterday and continued its decline overnight as oil prices continue their retreat.  WTI is holding under $50 a barrel and its 1.0% lower from yesterday.