Gross Domestic Product (GDP) Result & Effect

Today, Thursday 25th August 2022, the US economic docket highlights the release of the ‘Preliminary’ GDP print for the second quarter, which was scheduled at 15:30 GMT+3. This first revision is expected to show that the world’s largest economy contracted by 0.8% annualised pace during Q2 (April-June) - against the 0.9% decline estimated previously. Here are the results:

Please remember, while this is quarter-on-quarter data, it is reported in an annualised format (quarterly change x4). The ‘Previous’ reading listed (-0.9%) is the ‘Actual’ from the ‘Advance’ release. There are 3 versions of GDP released a month apart: ‘Advance’, ‘Preliminary’, and ‘Final’.

So what is the GDP?

A country’s GDP measures the monetary value of final goods and services - that is, those purchased by the consumer - produced in a country over a certain period (e.g. a quarter, year). The U.S. GDP q/q for example is released by the U.S. Bureau of Economic Analysis and shows the monetary value of all the goods, services and structures produced within a country in a given period of time. This figure is used by investors to determine how well or poorly the economy has been doing over the past quarter. For example, whether the economy has grown or shrunk. A higher GDP reading or a better than expected is deemed positive for most instruments, while a low reading is negative.

❗GDP essentially measures ‘if’ and ‘how’ much the economy is growing.

What’s the latest result?

The U.S. GDP has been confirmed as -0.6% which is slightly higher than the expected figure of -0.7%. So far the US Dollar has reacted positively as we edge closer to the U.S. market open. However, the GDP figure has confirmed that the U.S. economy has contracted for a third consecutive quarter.

The GDP figures suggest a slowdown in economic momentum in the first half of the year. Under the surface, however, there is more at play, including the impact of volatile categories but overall, consumer spending has decelerated. The back-to-back negative quarters, a common pattern for recessions, have increased concerns of an approaching downturn; some even believe it is already under way.

As for the markets, and as of writing, we have seen the strength of the dollar index (DXY) increase already by 0.20%, retracing its negative price action of the morning. The EUR/USD has been declining since the release, now by 0.18% and GBP/USD by 0.25%.

So why GDP and Forex?

Investors and traders are always required to process many reports over the course of the year. While most have varying levels of importance, the GDP is arguably the most impactful as it shows the power and economic stability of a country; thus, impacting heavily on the forex market in either direction. When the GDP report is released, traders are always paying attention.

A number of factors will influence the impact of a GDP release on a currency/currency pair. Of course, as always, traders should be aware to not anticipate markets to react the same way every time a GDP report exceeds or falls short of expectations. Past performance is not reflective of future results!

As we mentioned above, the GDP release indicates the expansion/contraction of a particular country. As a Forex trader, eyes will look for greater GDP and growth rates, in the hope that interest rates will follow suit and direction.

The U.S. GDP report is - and will most likely continue to be - an important release to consider when it comes to trading the forex markets. Traders learn to understand how to interpret and trade on this data and apply its direction to a particular trade will be the ones that come out on top.

So what do you think of the GDP? Something you will look at differently next time round? Let us know!