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The Dollar rises after GDP data further delays Federal Reserve rate cuts.
The Pound to Dollar exchange rate (GBP/USD) slid to 1.33 following news the U.S. economy expanded 3% on an annualised basis in the third quarter, exceeding the 2.4% markets thought was on the books.
This was up from the -0.5% contraction recorded in the first quarter, a contraction that was driven by a surge of imports as businesses looked to front-run tariffs.
"The dollar is climbing as traders push rate cut expectations slightly further into the future, lifting yields and widening interest differentials across the front end of the curve," says Karl Schamotta, FX Strategist at Corpay.
The Dollar has been steadily recovering amidst fading trade war tensions, clawing back losses suffered against the Euro, Pound and other currencies as investors get a better understanding of where the cards will land once this period of trade adjustment completes.
That could mean that the peak in the likes of the EUR/USD and GBP/USD pairs have been printed for now, and it will take another narrative to reboot the U.S. Dollar's 2025 depreciation trend.
Such a trigger could be the eventual deterioration in data that higher tariff barriers are expected to ultimately deliver. Indeed, Wednesday's GDP data dump contains sub-readings into other important areas of the economy, which hint that there are headwinds building.
Most notably, consumer spending was shown to have slowed to a post-pandemic low, while business investment is also slowing.
"Don't be fooled. Underlying growth was weak in Q2 and took a material step down in the first half of this year compared to 2024," says Oliver Allen, Senior U.S. Economist at Pantheon Macroeconomics. "Spending on goods at the start of the quarter was boosted slightly by a final wave of pre-tariff purchases, which is now unwinding sharply, setting up a weak Q3."
U.S. President Donald Trump welcomed the 3.0% growth in a post on Truth Social, but used the occasion to pressure the Federal Reserve into lowering interest rates.
"2Q GDP JUST OUT: 3%, WAY BETTER THAN EXPECTED! "Too Late" MUST NOW LOWER THE RATE. No Inflation! Let people buy, and refinance, their homes!" he said. ("Too Late" is Federal Chair Jerome Powell, who Trump has long been harassing to cut interest rates).
The Federal Reserve will deliver its latest policy update later on Wednesday, but no change to interest rates is expected. Fed members will be cautious, noting that a key measure of inflation - Core Personal Consumption Expenditures - rose at an annual rate of 2.5%, faster than the expected 2.3%.
The Fed target a 2.0% inflation rate, and observing the relatively robust economy and still-high inflation, might be tempted to maintain an air of caution.
A steady hand at the Fed can help the Dollar extend its short-term trend of appreciation, further pressuring GBP/USD.
"The economy is going to go through a period adjustment, with higher prices eroding consumer purchasing power and businesses rejigging supply chains to reduce their tariff bill, as well as relying more on technology than lower-skilled labor that will be less available. These disruptions are going to permanently lower the speed limit of the economy from the close to 3% pace we saw over the prior two years to somewhere a bit below 2% over the medium-term," says Ali Jaffery, an economist at CIBC Capital Markets.