US Dollar Down Amidst Fed Rate Cut, What Impact Will US GDP Have on Thursd

Written by Terri Belkas, Currency Strategist

The US dollar plunged across the majors on Wednesday, but the decline
came primarily during the European trading session and start of the
New York trading session in anticipation of the Federal Reserve's rate
decision.

The Fed pulled no surprises as they cut rates by 50bps to a more than
5-year low of 1.00 percent amidst a marked slowing in economic
activity and weak consumer spending. Likewise, slowdowns in many
foreign economies has created dim prospects for US exports, suggesting
that upcoming GDP figures on Thursday should signal a recession. The
Fed touted an array of different policy actions implemented recently,
including the October 8 coordinated rate cuts and efforts to boost
liquidity, saying that they should help to "improve credit conditions
and promote a return to moderate economic growth." However, the
central bank also noted that "downside risks to growth remain," and
combined with outlooks for more moderate inflation, the Fed seems
likely to cut rates even further before year-end. In fact, fed fund
futures are fully pricing in a 25bp cut at their next meeting on
December 16. Looking ahead to the next 24 hours, where the US dollar
goes will depend heavily on risk appetite. Our latest forex
correlations report shows that there is a solid inverse correlation
between the greenback and the Dow Jones Industrial Average as bouts of
risk aversion tend to send the currency spiraling higher on safe-haven
flows while the US stock markets plunge. Upcoming US data could have a
huge impact on the financial markets as Q3 GDP is anticipated to fall
to a 7-year low of -0.5 percent after surging 2.8 percent in Q2 on
robust export growth. However, with global growth slowing, foreign
demand for US goods is simply not there. Add to that the sharp
pullback in consumption and the outlook for the US is not good.
Looking at the Bloomberg News poll of 75 economists, consensus
forecasts range from -1.9 percent to 1.2 percent, but with the
majority calling for a negative result, there are potential downside
risks for the figure. Given the US dollar's inverse correlation with
US stock markets, the greenback could actually gain following this
release though, as the indications of recession may trigger selloffs
in the DJIA and S&P 500. However, if equity traders brush off the
data, fundamentals could finally start to have more of an impact on
the forex markets and the US dollar could tumble. Unfortunately for
those looking for a sustained drop in the greenback, the former
scenario may be more likely to occur.

Related Articles: How Will A Rate Cut And Recession Affect The
Dollar's Reserve Status?, The Fed Cuts 50bps But Can Rates And
Recession Turn The Dollar?

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