Forex Analysis & Reviews: 01.05.2025 - Why Did the Dollar Rise on...

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01.05.2025 09:06 AM

Why Did the Dollar Rise on Weak U.S. GDP Data?

The U.S. dollar completely ignored the sharp GDP contraction in the first quarter of this year, indicating that traders and investors are already prepared for a worse scenario than just a slowdown in growth for a single quarter.

According to the data, U.S. GDP in the first quarter fell by 0.3%, marking the first negative figure since 2022, compared to an expected increase of 0.2%. This unexpected decline sparked concern among economists and investors, forcing them to revise their outlooks for the rest of the year. The main contributors to the decline were a reduction in government spending and decreased investment in inventories. Despite this, consumer spending — which makes up a significant portion of GDP — remained resilient, indicating continued consumer confidence. However, concerns about inflation and high interest rates continue to weigh on the economy.

Another factor influencing the Federal Reserve's future decisions was the Personal Consumption Expenditures (PCE) index. This is the Fed's key indicator for setting interest rates, and in March, the PCE rose to 2.3% year-over-year — slightly below the forecast of 2.2%. More importantly, the core PCE, which excludes food and energy prices, matched the economic forecast at 2.6% year-over-year, but was down from the revised February figure of 3.0%.

This nuance is critical, as the Federal Reserve closely monitors the core PCE as its preferred inflation gauge. A lower-than-expected figure suggests that price pressures may be starting to ease, potentially giving the Fed more flexibility in its monetary policy. Given that the U.S. economy is no longer showing resilience and the labor market is beginning to show signs of weakness, the chances that the Fed will continue to keep borrowing costs elevated are quite slim.

Normally, expectations of rate cuts would put pressure on the U.S. dollar. But now, more than ever, it is crucial for the U.S. economy to avoid recession. Therefore, a more dovish Fed stance could actually support dollar demand rather than weaken it. Moreover, the gradually easing economic uncertainty caused by geopolitical risks related to trade tariffs is restoring the dollar's appeal as a safe-haven asset. Investors seeking safety in turbulent times will continue to move assets into dollars, which in turn will strengthen the currency.

In any case, the latest data presents a mixed picture for the U.S. economy. On one hand, the slowdown in private sector job growth and the GDP contraction signal a potential cooling of economic activity. Weak job creation may indicate declining consumer demand, and consequently, a reduction in production output. The negative GDP growth further confirms these concerns and could foreshadow more serious economic challenges ahead.

In the coming months, key factors that will determine the economy's trajectory include inflation trends, consumer demand, and the geopolitical environment.

As for the current technical picture for EUR/USD, buyers now need to focus on reclaiming the 1.1320 level. Only then can a test of 1.1380 be targeted. From there, a push toward 1.1440 becomes possible, but achieving that without support from large market participants will be rather difficult. The ultimate target would be the 1.1480 high. In the event of a decline, I expect meaningful buyer activity only around the 1.1265 level. If no one steps in there, it would be reasonable to wait for a retest of the 1.1215 low or to open long positions from the 1.1185 level.

As for the current technical picture for GBP/USD, pound buyers need to overcome the nearest resistance at 1.3330. Only then will it be possible to aim for 1.3370, above which a breakout will be quite difficult. The ultimate target would be the 1.3400 level. In the event of a decline, bears will try to gain control at 1.3280. If successful, a break of this range would deal a significant blow to the bulls and push GBP/USD toward the 1.3250 low, with the prospect of a drop to 1.3205.

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*Disclaimer: The market analysis posted here is meant to increase your awareness, but not to give instructions to make a trade.