Dollar Rises as GDP Data Points to Stubborn Inflation

The US Dollar is experiencing broad gains after the second release of the US GDP report. Traders were caught off guard by the rising inflation components. The US Dollar Index (DXY) has broken above 107.00 and continues to climb.

The US Dollar experienced a significant surge, with the US Dollar Index (DXY) breaking above the 107.00 threshold. This upward movement was largely attributed to the revised US GDP report, which revealed unexpected inflationary pressures. Traders were caught off guard by the strength of these inflation components, leading to a rapid reassessment of market expectations. The DXY, which tracks the dollar’s performance against six major currencies, reached a five-day high, reflecting the market’s heightened concerns.

Further contributing to market volatility were earlier sell-offs in gold and US yields, and lingering uncertainty stemming from President Trump’s discussions on trade tariffs. The unclear details surrounding which countries would be affected, and the timing of the levies, added to the overall market unease.

President Trump stated that Europe should prepare for a 25% tariff on autos and other items, though he did not specify when these tariffs would take effect. Trump criticized the European Union, claiming it was created solely to “take advantage of the United States.”

Meanwhile, the second GDP reading for the fourth quarter transformed a minor boost into a significant tailwind. The headline GDP reading came in higher than expected, and inflation elements showed significant increases. This comes just one day before the Federal Reserve’s preferred inflation gauge, the Personal Consumption Expenditures (PCE) reading, putting inflation back at the forefront of economic concerns.

Market Movers: PCE Friday is More Crucial Than Ever

Overnight, several US officials had to clarify the current timeline for US tariffs after President Trump made conflicting statements about the types of tariffs, their timing, and the affected countries. This confusion triggered a sharp selloff in Gold, previously seen as a tariff safe haven, according to Bloomberg.

Key data released on Thursday includes:
– The second reading of the US GDP for Q4 2024 showed an annualized growth rate of 2.3%, as expected.
– The headline preliminary PCE component rose to 2.4%, surpassing the 2.3% forecast, with the core number reaching a red-hot 2.7%, above the 2.5% expectation.
– US Initial Jobless Claims for the week ending February 21 increased to 224,000, with specific numbers for Washington D.C. showing an upward trend. The DOGE effect is apparent here. US Continuing Claims for the week ending February 14 fell to 1.862 million, below the expected 1.870 million and the previous 1.869 million.

At 16:00 GMT, the US Kansas Fed Manufacturing Activity Index for February will be released, with no forecast available. The previous reading was -5.

Five Federal Reserve officials are scheduled to speak:
– At 15:00 GMT, Federal Reserve Vice Chair for Supervision Michael Barr will discuss “Novel Activity Supervision” at the Bank and Fintech Arrangements TechSprint event in Washington, D.C.

– At 16:45 GMT, Federal Reserve Governor Michelle Bowman will focus on Community Banking at the Fort Hays State University Robbins Banking Institute Lecture Series in Hays, Kansas.

– At 18:00 GMT, Federal Reserve Bank of Richmond President Thomas Barkin will speak about “Inflation then and now” in Fayetteville Cumberland Economic Development, North Carolina.

– At 18:15 GMT, Federal Reserve Bank of Cleveland President and CEO Beth M. Hammack will participate in the “2025 Bank Regulation Research Conference” at Columbia University/Bank Policy Institute in New York.

– At 20:15 GMT, Federal Reserve Bank of Philadelphia President Patrick T. Harker will discuss the economic outlook at the Lyons Economic Forecast, presented by the University of Delaware’s Center for Economic Education and Entrepreneurship in Newark, Delaware.

Equity markets are declining in both Europe and the US, with US indices down by less than 1% and Europe facing larger losses near its closing bell.

The CME Fedwatch Tool indicates a 33.0% chance that interest rates will remain unchanged in June, with the remainder showing a possible rate cut.

The US 10-year yield is trading around 4.28%, close to its low for the week at 4.24%, and significantly below last week’s high of 4.574%.

US Dollar Index Technical Analysis: Persistent Moves

The US Dollar Index (DXY) has not fully benefited from President Trump’s recent tariff comments. The USD’s potential gains are being tempered by ongoing declines in US yields. Keep an eye on inflation-sensitive data that could counteract current Federal Reserve rate cut expectations, potentially pushing US yields higher and strengthening the Dollar.

On the upside, the 100-day Simple Moving Average (SMA) near 106.75 may limit bullish advances. From there, the next target could be 107.35, a key support level from December 2024 and January 2025. Should US yields rise again, even 107.95 (55-day SMA) could be tested.

Conversely, if the DXY falls below 106.52, another dip might be needed to attract Dollar bulls near 105.89 or even 105.33.