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2 Factors That Will Impact This Week’s Currency Moves

Currency Exchange Market Scene

The U.S. posts largest GDP growth in two years and German inflation reaches two-year high. Here are two factors that will impact currency moves this week, October 31 – November 4.

1. U.S. Posts Largest Expansion of Economy in Two Years

The U.S. GDP (growth domestic product) posted its largest expansion in two years on Friday. The Bureau of Economic Analysis said GDP rose to an annual rate of 2.9% (seasonally adjusted) between July and September. The figure was significantly higher than the 1.4% posted in the second quarter of the year, and was the largest expansion since 2014.

Analysts were expecting growth of 2.5%.

The majority of the growth was driven by a 10% increase in exports. Real consumer spending increased by just 2.1%, which missed estimates of a 2.6% increase. In the previous quarter, consumer spending was up by 4.3%.

Still, the stronger-than-expected GDP growth may be enough to convince the Fed to raise rates before the end of the year. Several Fed officials have indicated that rates may be increased if the economy and labor market continue to improve.

Right now, market players are pricing in on a 78% chance of a rate hike in December.

“Higher rates will make the dollar more attractive to yield-seeking investors,” said a representative of the online trading platform Opteck. “The upbeat GDP report and its support for the case of raising rates may push the dollar higher at the start of the week. We’re already seeing an increase in Opteck CFDs for the dollar.”

2. German Inflation Hits Two-Year High

German inflation rose to a two-year high in October, beating estimates, according to data released on Friday. The inflation boost is a sign that the European Central Bank’s monetary policy is starting to minimize the threat of deflation in the EU.

A recovery in German inflation may give hawkish ECB members grounds to call for a reduction in the central bank’s bond-buying program. But some economists are not convinced that the data would be enough to convince the ECB to unwind its current stimulus.

Inflation rose to 0.8% from 0.7% last month. The Federal Statistics Office also said German consumer prices were up 0.7% on the year after posting a 0.5% increase in September.

Germany’s data comes ahead of euro zone inflation data, due Monday. Economists are forecasting inflation to come in at 0.6%.

Upbeat inflation data out of the eurozone may boost the currency next week.