US: GDP expected to rebound solidly in Q3 - MUFG

Lee Hardman, Currency Analyst at MUFG, notes that the US dollar has strengthened modestly in the Asian trading session supported by the release yesterday of a batch of stronger than expected US economic data which has reinforced market expectations that the Fed will resume rate hikes in December.

Key Quotes

“The US dollar has already rebounded sharply this month and is now moving closer to stronger technical resistance levels from the cyclical highs recorded at the turn of last year which could help dampen further upside in the near-term.

The latest trade and wholesale inventories reports for September both proved stronger than expected reinforcing expectations that the US economy rebounded solidly in Q3 after weak growth in the first half of the year. The US economy appears likely to have returned to above trend growth of over 2.0% in Q3 which would provide the Fed with the reassurance required to resume rate hikes in December.

The release of the latest services PMI survey also sent an encouraging signal that more solid growth momentum is likely to be maintained in Q4. The survey revealed that business confidence in the services sector increased to 54.8 in October which was the highest level since November of last year and represents a marked step up from the average of 51.4 recorded during the rest of this year.

The stronger October reading should be treated with some caution before awaiting further confirmation of the improvement in the coming months. Reassuringly it follows the improvement already evident in the ISM surveys which revealed business confidence in September increased to its highest level since October of last year. The combination of strengthening cyclical momentum for the US economy and building Fed rate hike expectations are providing a favourable tail wind for the US dollar into year end.”