Preliminary US GDP Q1 Report: The US Dollar may benefit from indications of a recession.

The Gross Domestic Product (GDP) report for the first quarter of 2023, as released by the US Bureau of Economic Analysis (BEA) on April 27th, is expected to show an expansion of the US economy at an annualized rate of 2.0%, after the 2.6% growth recorded in the GDP report for the fourth quarter of 2022.

The US Dollar (USD) has been weakening against its major rivals since early March after the collapse of the Silicon Valley Bank reminded markets of the negative impact of the Federal Reserve’s (Fed) tight monetary policy on the financing conditions. The GDP report will provide fresh clues regarding the state of the United States economy in early 2023 and drive the US Dollar’s action by influencing the market pricing of the Fed’s policy outlook.

US Gross Domestic Product forecast: What numbers could tell us

Thursday’s US economic docket highlights the release of the preliminary GDP print for the first quarter, scheduled at 12:30 GMT. The first estimate is expected to show that the world’s largest economy expanded by 2.0% at an annualized pace during the January-March period.

Yohay Elam, FXStreet Senior Analyst, thinks markets will pay close attention to the severity of the slowdown in the first quarter’s economic activity.

“There is no doubt that the US economy is slowing, but the pace matters. A deceleration to 2% would be the sweet spot for markets – ongoing expansion without fears of an imminent recession,” Elam explains. “It would represent a return to the “new normal” GDP growth figures that characterized the post-financial crisis era. Conversely, a faster clip would stoke fears of further rate hikes by the Fed, while slower growth would raise recession angst. The middle 2% would be Goldilocks for markets and adverse for the US Dollar.”

When is GDP report released and how can it affect EUR/USD?

The GDP report is scheduled for release at 12:30 GMT on Thursday. The US Dollar stays dangerously close to multi-month lows against the Euro ahead of this data amid diverging policy outlooks between the European Central Bank (ECB) and the Fed.

Although the backward-looking data might do little to influence market expectations about the Fed’s next policy move, it could revive fears over the US economy tipping into recession later in the year. In that scenario, the Fed “policy pivot” narrative could gain traction and force the USD to stay on the back foot. That said, an upward surprise of the US GDP print could revive expectations about the Fed staying focused on battling inflation and help the Greenback stage a rebound, at least with the initial reaction.

According to the CME Group FedWatch Tool, markets are nearly fully pricing in one more 25 basis points (bps) Fed rate hike at the May 2-3 policy meeting but seeing a more than 80% probability that there will be an at least one 25 bps rate cut by September policy meeting.

Eren Sengezer, Senior Analyst at FXStreet, shares his technical outlook for EUR/USD: “The Relative Strength Index (RSI) indicator on the daily chart stays near 60, suggesting that EUR/USD has more room on the upside before turning technically overbought. Additionally, the gap between 20-day Simple Moving Average (SMA) and the 50-day SMA continues to widen following the bullish cross seen in early April, supporting the bullish view.”

Eren also points out the key technical levels for the pair: “1.1100 (psychological level) aligns as next resistance for the pair ahead of 1.1160 (static level from March 2022). With a daily close above the latter, the pair could face interim resistance at 1.1200 (psychological level, static level) before targeting 1.1300 (psychological level, static level). On the downside, 1.1000 (20-day SMA, psychological level) forms first support ahead of 1.0900 (static level) and 1.780/1.0760 area (50-day SMA, 100-day SMA).

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